Foreigners buy India debt on eve of index inclusion, indicators signal

Three indicators in India's foreign exchange markets pointed to foreigners, potentially passive funds, buying the country's sovereign debt on Thursday, a day before the country's inclusion in the JPMorgan emerging market debt index.
 

Firstly, the rupee rose to 83.4525 per dollar, up 0.14 per cent on the day, despite a jump in US Treasury yields on Wednesday.

Additionally, the dollar/rupee "daily fix" was dealt at a discount to the reference rate that the Reserve Bank of India (RBI) will release this afternoon. This indicates a higher supply of dollars at the reference rate relative to demand.
 

Finally, the very-near dollar/rupee swap points also rose, signalling dollar inflows, traders said.
 

India's inclusion in JPMorgan's widely-tracked emerging market debt index was announced in September, setting the stage for billions of dollars to flow into the world's fifth-largest economy.
 

"Index flows are there, mostly foreign banks on offer," a forex salesperson at a large private sector bank said.

Traders expected passive inflows related to the inclusion on Thursday and Friday, even though overall foreign buying in bonds through the fully accessible route crossed $10 billion since the inclusion announcement.
 

The benchmark bond yield was down 1 basis point (bp) at 6.99 per cent. The 10-year US Treasury yield climbed 8 bps on Wednesday.
 

"It definitely looks like the flows are hitting. The foreign banks are on the offer (on dollar/rupee) and are paying" the very near-term swaps, a senior currency trader at a mid-sized private sector bank said.
 

The foreign banks that are known to have large foreign custodial clients are selling dollars, and "it is reasonable to assume" it is tied to the inclusion, more so with "the dollar bid in Asia", a treasury official said.
 

The rupee, however, is not expected to appreciate significantly amid the inflows.
 

"Expect the RBI to prudently manage the flows," Mandar Pitale, head of treasury at SBM Bank India, said. "Don't think there will be any runaway appreciation.. on the rupee.. RBI is likely to be present on both sides."
 

The RBI will be watchful and may intervene if there is excess rupee appreciation, said Deepak Bhayana, managing director and head of global markets, India, at MUFG Bank, while adding that partial flows may have been hedged in the non-deliverable forwards market.