InvestorQ : Why are foreign investors once again buying into Indian bonds?
Moii Chavate made post

Why are foreign investors once again buying into Indian bonds?

Tisha Malhotra answered.
2 months ago

Here is what you need to know about the FPI flows into bonds in the recent past and how the trend has recently changed. Here is some important update on the same.

a) A six-month bond selling spree by foreign investors may have ended in August with most FPIs looking to invest into India amidst a rupee that looks to be bottoming out around 80/$ with limited downside risk.

b) Most foreign investors have also aligned their debt flows with the softening of global oil prices and domestic inflation. Most FPIs are wary of India’s elevated trade deficit and its oil dependency. That is likely to change now.

c) Even as foreign investors have infused over $3 billion into equities, they have also purchased Indian government bonds worth $502 million on a net basis, in the first half of the month of August 2022. That is a positive start.

d) Between February and July 2022, the FPIs had been net sellers in Indian bonds as the US fed had turned inordinately hawkish and the RBI had also embarked on an aggressive rate hiking cycle to combat inflation. However, now there are signs of inflation cooling.

e) What is now attracting foreign investors to Indian bonds is the high yields, coupled with expectations that easing prices will allow RBI to be less hawkish. Also, the rupee bottoming around 80/$, protects their dollar returns.

f) Originally, the terminal repo rate consensus in India was 6.50%, but those expectations have come down to around 6%, which is just about 60 bps higher from current rates. That has also boosted bond flows into India.

g) In real inflation adjusted returns, Indian bond yields are already in the positive, while the US bond yields are still yielding negative returns. Indian bonds are also attractive from an emerging markets perspective.

h) With the recent report by Goldman Sachs indicating that Indian bonds could be admitted to global bond indices in 2023, the prospects of elevated passive flows of $30 billion into bonds have also made Indian bonds attractive.

Overall, the risk-reward is firmly in favour of Indian bonds.