Foreigners unwinding Indian bond derivatives holdings draws RBI attention

Foreign investors unwinding their long positions in Indian sovereign debt through proxy derivative instruments has weighed on bonds recently, prompting the central bank to make enquiries, four traders said.
 

These investors have sucked out more than Rs 1,400 crore (about $167 million), on a net basis, from Fully Accessible Route (FAR) securities in just the past three sessions, swinging the aggregate for the month so far to net sales of Rs 200 crore.
 

That combined with more than $8 billion in foreign outflows from the domestic equity markets so far in October has sent the rupee to record lows and, in turn, invited the Reserve Bank of India's (RBI) scrutiny.
 

Officials from RBI's financial markets department have called foreign banks that trimmed positions in FAR securities, one of the traders said.
 

"They enquired about their negative outlook on Indian bonds and sought feedback on the unwinding of large positions" but have not given any specific instructions, the trader said.
 

The traders asked not to be named as they are not authorised to speak with the media. The RBI did not immediately respond to an email seeking comment.
 

Foreign investors still hold Indian government debt worth Rs 2.47 trillion -- either through FAR securities or through derivatives such as total return swaps (TRS) -- but the current selling pressure could lead to the first monthly net outflow since April.
 

Much of the sales is down to foreigners unwinding their TRS positions, which are mostly unhedged, due to the volatility in global bond yields ahead of the US Presidential elections, two of the traders said.
 

TRS allows an offshore investor to exchange some form of fixed payment to an onshore bank in return for the equivalent in bond yields. The underlying bond in such trades is bought and held by the bank, not the foreign investor.
 

The outstanding notional value of offshore derivative instruments (ODIs) was around Rs 21,800 crore, or $2.6 billion, as of July 2024.
 

The recent fall in the rupee past the psychologically important level of 84 against the US dollar also led to nervousness and some position unwinding, one trader said.

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