Foreign investors pour $538 mn into Indian bonds in Sept, turn net buyers

Foreign investors poured $538 million into Indian bonds in September, the first inflow in seven months, following the trend in other Asian debt markets.

In September, foreign investors poured over $1 billion into Asian government and corporate bonds, more than doubling their investment in local currency debt from the previous month, attracted by higher yields and some signs of economic recovery.  The inflows in September “could be a sign of foreign capital returning” to India, said  Duncan Tan, a strategist at DBS Bank.  He said India’s relatively high-yielding government debt had become attractive for foreigners with the Reserve Bank of India (RBI) reluctant to ease monetary policy further to avoid fuelling inflation.

But Jitendra Gohil,  head of India equity research, Credit Suisse Wealth Management, argued that despite rising inflation, Indian bond yields cooled off after the RBI announced a series of unconventional measures to ease the financing conditions further.  The Indian 10-year government bond yield fell 13 basis points to 5.90 per cent, while the 10-year AAA corporate bond yield declined 13 basis points to 6.75 per cent.

"In our base case, we continue to see space for an additional 50 basis point rate reduction in the upcoming  (Monetary Policy Committee) meetings. We expect yields to continue to drift lower in the near term, supported by continued OMO (open market operation) announcements and other unconventional policy measures by the RBI. While the fiscal and supply risks have not completely faded, these will likely only surface later in the year. Globally, too, the interest rates are expected to remain lower for longer. The yield curve in India is steep, which is attractive. Hence, we now prefer medium- to long-duration bonds. Within the corporate bond market, we continue to recommend AA-rated or higher-grade bonds," Gohil said.

The data from regional central banks and bond market associations in Indonesia, Malaysia, Thailand, South Korea and India showed that Asian local currency bonds received inflows of $1.26 billion last month. 

That was down from $2.13 billion in September 2019, but up from $489 million in August.

Asian countries have had mixed success in containing the Covid-19 outbreak and protecting their economies, but foreigners became net sellers of Asian equities in September on concerns about a virus resurgence, prompting them to sell $6.5 billion worth of regional equities. The bonds markets in places, such as India and Thailand, could therefore be benefiting from a portfolio rebalancing, analysts said.

Khoon Goh, head of Asia Research at ANZ, said inflows to the region in general should resume once uncertainty around the highly-contested US election in November is "out of the way" given the economic backdrop.

With inputs from Samie Modak in Mumbai