High yields, RBI support could spur FPI flows into India debt

Mumbai: Net foreign investments in Indian debt through the Fully Accessible Route (FAR)-eligible bonds remained modest in November at about ₹5,760 crore. The month saw both inflows and outflows-the first driven by expectations of a rate cut this week, and the latter triggered by the recent depreciation of the rupee to record lows.

Economists said the medium-term view remains supportive as the Reserve Bank of India (RBI) is expected to support the bond market via open market operations (OMO) purchases. Furthermore, the interest rate differential between India and other emerging market economies provides leverage for foreign investors to invest in India.

"Yields on Indian bonds have been higher over the past couple of months, and the interest rate differential between India and other Asian countries like China provide a good entry point for FPIs at this moment," said Madhavankutty G, chief economist at Canara Bank.


Market participants also expect policy support for bond yields, especially due to a delayed US trade deal and the decline in the Indian rupee. The rupee closed at 89.55/$1 Monday, its weakest ever closing.

"Indian bonds are likely to be more attractive as I expect the RBI to come up with some policy support for yields," said Dhiraj Nim, economist and FX strategist, ANZ Bank. "If the RBI cuts rates this week, it will be the last rate cut. After that, I expect open market operations, especially if a trade deal does not happen. So OMOs could make bonds more attractive."

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Talks of India's sovereign bonds being included in Bloomberg's Global Aggregate index are also expected to prompt inflows as market participants have given an optimistic view on the ease of trading, India's sovereign rating, and the overall returns on Indian government bonds versus other emerging market bonds.

"Flows on expectations of an inclusion don't come at the end, they are frontloaded," said Madhavankutty G.

To be sure, Indian FAR securities are currently part of the JP Morgan EM index, Bloomberg EM local currency government index and the FTSE Russell EM government bond index.