Govt bonds receive $1 billion inflow as investors shrug off curbs

By Subhadip Sircar

Indian government bonds eligible for index inclusion saw the highest-ever overseas inflows last week, suggesting the central bank’s curbs on the securities have done little to dampen investor sentiment.

Offshore investors bought Rs 90.9 billion ($1.1 billion) of the so-called fully accessible route bonds in the week through Aug. 2, against Rs 27.6 billion in the previous week, data collated from the Clearing Corp. of India showed.  

The flows came despite the Reserve Bank of India’s surprise move to restrict access to new Indian government bonds with 14-year and 30-year tenors. Indian authorities are concerned about the billions of dollars of hot money inflows tied to the inclusion of its debt in a key global index.  

“Flows seem unaffected because foreign portfolio investors prefer five- to 10-year bonds for their purchases and can find offloading longer-tenor bonds challenging,” Morgan Stanley strategists Nimish Prabhune and Min Dai wrote in a note. The average of foreigners’ duration is about 5.5 years, they said.

An increase in India’s weight on JPMorgan Chase & Co.’s emerging market index to 2 per cent, from 1 per cent at the time of inclusion in June, aided flows. India will ultimately enjoy a 10 per cent weight in the gauge, with an incremental gain of 1 per cent each month.

The foreign ownership of FAR bonds has surged by 18 basis points and stands at 5.1 per cent of the total outstanding, Morgan Stanley strategists said. “India seems well positioned as growing anticipation of a Federal Reserve rate cut starting next month can lead to a surge in foreign inflows to FAR bonds,” they said.