Rupee's decline to record low triggers biggest selloff in Indian bonds

By Subhadip Sircar and Ronojoy Mazumdar

The Indian rupee’s decline to a record low on Friday pushed foreign investors to reassess their frenzied buying of the country’s assets, triggering the biggest selloff in Indian bonds in a year.     

Global funds sold a net $425.3 million of rupee-denominated bonds Friday, according to government depositories’ latest data. Selling was concentrated in index-eligible government bonds, with foreign holdings dropping by 38.81 billion rupees ($466 million) on the day, data from the Clearing Corp. of India show. 

The selloff came on the day when the rupee fell by the most in six months. Investors’ quick portfolio realignment underscores how they manage currency risk amid a robust appetite for the fast-growing economy’s assets.

Overseas investors may have snapped up Indian assets with little thought to hedging currency risk, given the Reserve Bank of India’s efforts to keep the rupee within a tight trading band. The currency’s low volatility could have left investors with exposed unhedged positions, according to Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore.

“Offshore investors may have wanted to limit potential losses on what is still an off benchmark position,” he said. “Much the same way you see equity selloffs on such days.”

Foreign funds have flocked to Indian debt ahead of their inclusion in the JPMorgan Chase & Co’s global bond indexes in June, resulting in nearly $10 billion of inflows into the so-called Fully Accessible Route bonds. The stable rupee — among the least volatile in emerging markets — has been part of the allure. 

“We expect the RBI to smooth volatility,” Macquarie Capital strategists including Trang Thuy Le wrote in a note. “But with INR having outperformed recently and crowded positioning, it is possible that the RBI may allow some further upside to USDINR to 84-85 range, before engaging in heavily.”

The rupee fell 0.1 per cent Wednesday to 83.3275.