The liquid five-year 7.38% rated 2027 bonds suffered enormous loss wiping out 8.7 Indian rupees worth of investment, and the 14-year 7.54% rated 2036 bonds being a close second, losing 8.2 billion Indian rupees over the two sessions.
International investors have sold off Indian government bonds worth nearly $500 million over Friday and Monday, leading to the “fully accessible route” or FAR bonds bearing the consequences of the action. They sold a net of 41.1 billion Indian rupees ($497.05 million) of bonds, out of which 80% accounted for securities that were exempt from restrictions under FAR for investors. The Indian sovereign bond market has always remained on the backstage compared to the equity markets when it comes to Foreign Portfolio Investments.
The liquid five-year 7.38% rated 2027 bonds suffered enormous loss wiping out 8.7 Indian rupees worth of investment, and the 14-year 7.54% rated 2036 bonds being a close second, losing 8.2 billion Indian rupees over the two sessions.
India removed foreign investment caps on a collection of securities under the “fully accessible route” in April 2020, allowing non-residents to invest in specified GoI bonds and to meet a fundamental requirement of global index inclusivity. These securities have received tremendous amounts of foreign currency inflow. In the period of July-September 2022, there was a ₹100 billion net inclusion benchmarking on inclusion in global indexes by JP Morgan.
Foreign investors sold FAR bonds for the first time in seven months. The disappointment over the non-inclusion of the bonds in major global indexes that actually spiked buying interests in the first place, the falling value of the rupee and better-denominated dollar returns in other nations laid the conditions for foreign investors to unwind and exit the Indian debt market naturally.
“Inflows that were solely on the basis of index inclusion bets are now seeing reversal as any talk regarding inclusion is now some time away,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
This impetuous decision by the market was also attested to the Fed’s policy decision due Wednesday, which will set the future of interest rates and non-farm payroll data on Friday and consumer inflation in the coming week. The US Federal Reserve is expected to ramp up interest rates by another 75 basis points, potentially for the fourth time this year.
“Since we have events lined up in the form of the Fed policy meeting and a couple of important economic data points, traders who do not want to punt are moving out,” said Anuj Bhala, head of rates trading at SBM Bank (India).
Traders are also awaiting the meeting set by the Reserve Bank of India, which is likely to debate the bank’s response to the government owing to the inability to meet the inflation target for three quarters consecutively.
Wall Street investment banking powerhouse JP Morgan had in October pre-recognised the chances of Indian government bonds not making the cut to emerging global market indexes and hence refrained from including the debt in its gauge. Last month, the bank ascertained to keep rupee government notes away from the S&P Global Developed Sovereign Bond Index on account of investment obstacles and a prolonged registration process. The investment bank added that India should continue to remain on the positive index watch on the basis of investor feedback this time.
Goldman Sachs, the Wall Street Giant, had projected that the inclusion of India in the global bond index would have the potential to hike up passive inflows by about $30 billion.
The Indian rupee depreciated to 82.74 from 82.70 per US Dollar ahead of Fed’s policy guidance on Wednesday.