Global funds eye India's maturity bonds betting on RBI's policy shift

By Mary Nicola, Catherine Bosley and Malavika Kaur Makol

Global funds are snapping up India’s longer-maturity bonds in a bet the central bank will eventually become less hawkish and as they position for those securities that will be included in JPMorgan Chase & Co. indexes. 

The proportion of foreign money allocated to local bonds due in 10 years or more climbed to 17 per cent last week, up from just 11 per cent in September, while that in debt maturing in five years or less slipped 10 percentage points to 44 per cent over the same period, according to calculations by Bloomberg. 

India’s bonds due in 11-to-15 years are “still the favored part of the curve,” said Jerome Tay, a fixed-income fund manager at abrdn Plc in Singapore. “It’s really backed by the whole idea that inflation is coming down” and the Reserve Bank of India backing off its tight monetary policy, he said.

This year is set to be pivotal for Indian financial markets, with Prime Minister Narendra Modi up for reelection and the nation’s bonds slated to join JPMorgan’s flagship emerging-market index in June. The accession — announced in September — is likely to attract inflows of as much as $40 billion, according to estimates from Goldman Sachs Group Inc. and others. 

One reason for global funds to buy longer bonds is the RBI’s expected pivot to an easing policy. While economists have been pushing back bets on when rate cuts will start, they are still forecast to begin between October and December, based on Bloomberg surveys. The annual inflation rate fell below 5 per cent in March, edging closer to the central bank’s 4 per cent target. RBI Governor Shaktikanta Das has said policymakers wouldn’t consider easing unless inflation settles durably around 4 per cent.

Investors anticipating rate cuts typically buy longer-maturity bonds in advance to lock in potential returns. 

“I believe investors rather prefer the 10-year or longer since RBI’s hawkish stance and low carry versus US dollar funding costs (negative net of taxes) make it difficult for clients for hold on to the shorter end,” said Abhay Gupta, a strategist at Bank of America Corp. in Singapore.

The Indian debt eligible to join JPMorgan’s index will be drawn from that subset securities which are freely available to overseas investors, known as “Fully Accessible Route” or FAR bonds for short. They must also have a remaining maturity of 2.5 years or more, and a face value of more than $1 billion, according to a JPMorgan spokeswoman. 

Bloomberg Index Services Ltd. will also start including India in its emerging markets index from January. Bloomberg LP is the parent company of Bloomberg Index Services, which administers indexes that compete with those from other providers.