Demand for Indian bonds likely to pick up: Barclays

The demand for Indian bonds is likely to pick up in the coming days in the wake of declining commodity prices and rationalised debt limits for foreign investors, according to a Barclays report.

While the foreign demand for Indian government bonds has been subdued in the past few weeks, the demand is likely to pick up in the run up to the RBI's May 3 policy meeting, Barclays said.

Moreover, the auction results on April 22, also indicate that the improving macro fundamentals (in particular in the wake of declining commodity prices) and rationalised debt limits have been welcomed by foreign investors, Barclays said.

On April 22, Rs 291.08 billion worth of government debt was auctioned to foreign investors. This was the first auction after market regulator SEBI simplified the FII rules.

"Recent developments - the downside surprise in March WPI inflation, the decline in commodity prices and its positive impact on inflation and India's twin deficits, and the sharp decline in March trade deficit - should help to extend the rally in Indian Government bonds," Barclays said.

In addition, the weakening of the Japanese Yen and the "portfolio effect" of the Bank of Japan's monetary stimulus are also likely to result in inflows into emerging market assets.

Barclays further noted that most of the inflows are likely to go to high-yielding Eastern Europe, Middle East, and Africa and Latin America local currency bonds, while Asian assets are likely to witness a marginal increase in flows.

Out of the Asian assets, flows are likely to go into high-yielding Indian and Indonesia bonds, strengthening the case for extension of Indian government bonds rally, Barclays said.

On April 26, the Government securities (G-Sec) rose on good buying support from banks and corporates.

The 8.15% G-Sec maturing in 2022 surged to Rs 102.60 from Rs 102.42 on Friday, while its yield went down to 7.74% from 7.77%.