Foreigners selling Indian govt bonds won't return in a hurry: ANZ India

Given the volatility expected over the short-term horizon, we cannot imagine that we will receive any major inflows over the next two months, they added

Foreigners that sold Indian government bonds in November may not be in hurry to return as pressure on the local currency is expected to continue and as interest rate cuts seem to be delayed, ANZ India's treasurer said.

These investors took out Rs 10,400 crore ($1.23 billion) of bonds on a net basis under the Fully Accessible Route, over 11 sessions this month, according to clearing house data on Thursday. Most of the bonds are part of JPMorgan's emerging market debt index.

"If our currency is expected to weaken and we are not seeing any immediate monetary policy action, it may make sense for foreign portfolio investors (FPI) to sell now and buy back at a later period," Nitin Agarwal, head of trading at ANZ India, said earlier this week.

The Indian rupee hit a record low of 84.44 against the US dollar earlier in the day, and is down 0.4 per cent so far this month.

"Overall, given the volatility expected over the short-term horizon, I do not imagine that we will receive any major inflows over the next two months."

US President-elect Donald Trump's proposed trade and fiscal policies could also result in emerging markets performing poorly, with the overall assets under management of JPMorgan's emerging market debt index expected to dwindle.

If there are fewer funds tracking JPMorgan's index, after they shift their focus to the US from emerging markets, it will lead to lower flows into Indian government bonds, Agarwal said. This is why tracking the index is important, he added.

Foreign lenders, which have been the biggest sellers of Indian bonds this month, are also expected to stay away.

"Foreign banks expected significant monetary policy easing and continued foreign inflows and positioned themselves accordingly. When these expectations reversed, positions have been pared down," Agarwal said.

The Reserve Bank of India could deliver a rate cut in February, Agarwal said, but acknowledged that the window for the central bank to lower rates is "fast closing from an inflation print perspective."