Foreign investors sell nearly $1 bn of JPM index-linked govt bonds in Nov

By Dharamraj Dhutia

MUMBAI (Reuters) - Foreigners have sold Rs 8,210 cr ($973 million) of Indian government bonds, which are part of the JPMorgan index, so far in November, according to clearing house data on Thursday.

A rise in US yields along with a stronger dollar have driven the selling, traders and analysts said. They expect the outflows to persist until global market volatility settles.

"Foreign inflows will likely wait for US yields and dollar index to stabilise before reverting to its pre-October pace," said Nitin Agarwal, head of trading at ANZ India.

"The various index inclusions still warrant more inflows; however, investors might choose to run a bit underweight India," Agarwal said.

For the first 10 months of 2024, foreigners bought Rs 1.18 trillion of bonds, driven by India's inclusion in the JPMorgan index on June 28.

The Bloomberg Index Services and FTSE Russel will add Indian debt to their emerging market bond indexes in January and September 2025, respectively.

The 10-year US yield was around 4.50 per cent on Thursday, up nearly 20 basis points (bps) since Donald Trump was elected president last week.

Yields have risen as expectations of US interest rate cuts have dwindled. Investors now see an 82 per cent chance of a Federal Reserve rate cut in December, but anticipate only two more reductions in 2025, down from four previously.

Indian bond yields, meanwhile, have barely changed since Trump's win, narrowing the spread between domestic and US 10-year bond yields to an 18-year low.

"We expect the spread between US and India bond yields to stay low as US yields get re-priced higher post US election, while India yields remain relatively stable," said Edward Ng, senior portfolio manager for Asian fixed income at Nikko Asset Management.

In the near term, the India-US yield spread will be largely driven by volatility in US rates as the market is still trying to find a new equilibrium for the rates post the election, he said.

A 3 per cent rise in the dollar index since Trump's presidential victory is seen as a negative for emerging markets, including India, as investors tend to move money out of risky assets.

Funds may see rotation out of emerging markets into the United States if US real yields were to increase, ANZ India's Agarwal said. He believes a rise in US yields is one of the factors for debt outflows from India.