India's government bond outflows in April not normal, say analysts

The recent sharp foreign investor selling in Indian government bonds in April, marking the highest monthly sales since the Covid-19 pandemic, is only an aberration, with inflows likely to continue in the coming months, senior market participants said.

A large part of these outflows have happened on the back of weakness in the local currency and a jump in US yields as investors repriced rate cut expectations, they said.

"We are not expecting large-scale outflows because of rupee weakness or consistent dollar strength; the recent drop in rupee will not lead to a change in our outlook," said Parul Mittal Sinha, India head of financial markets at Standard Chartered Bank.

Foreign investors sold bonds worth 14,950 crore rupees ($1.79 billion) on a net basis in April, the highest in the four years, after net purchases of bonds worth 81,600 crore rupees between October and March.

April sales include the net sale of 9,900 crore rupees of bonds under the Fully Accessible Route (FAR) that are due to be included in JPMorgan's index from June, marking the largest ever monthly sale since the category was carved out in 2020.

"There is broad caution in terms of emerging markets, but India is benefiting as it has a lower co-relation and lower beta vis-?-vis US yields," said Mitul Kotecha, head of currency and emerging market macro strategy for Asia at Barclays.

The rupee hit a record low in April, while the 10-year US yield jumped 49 basis points, worrying investors, but the Indian benchmark yield only rose 13 bps as local fundamentals stayed supportive.

Sinha anticipates inflows of $25-$30 billion going ahead as she believes index trackers are yet to bring in their funds.

Barclays' Kotecha eyes $20-$25 billion, with upside risks as an attractive carry, stable currency, and a positive macro backdrop and fiscal picture make Indian bonds attractive.

Rick Cheung, portfolio manager for emerging market debt at BNP Paribas Asset Management continues to remain bullish and expects the benchmark yield to ease below 7 per cent in the near term from 7.17 per cent currently.

Top five government securities that witnessed most outflows:

Securities Outflows in billion rupees

07.38 per cent 2027 59.1

07.37 per cent 2028 54.5

07.33 per cent 2026 43.8

07.32 per cent 2030 22.3

07.10 per cent 2029 13.5

($1 = 83.4220 Indian rupees)