Overseas investors pulled out ₹222 billion ($2.37 billion) from Indian bonds between March 1 and April 15, according to reports from The Hindu BusinessLine. This massive outflow was triggered by India's tightening of foreign exchange trading rules between late March and early April. The benchmark 10-year bond yield surged by nearly half a percentage point to 7.15%, as bond yields move inversely to prices.
India tightened rules for forex trading to support a rupee that fell to record lows as the Iran war pushed up oil prices, worsening the growth and inflation outlook for the net oil-importing country. As reported by The Hindu BusinessLine, Ajay Marwaha, head of fixed income markets at Nuvama, explained that the FX measures helped the rupee but led to a surge in the cost of hedging rupee exposure overseas. This created an opportunity for already invested funds to unwind their hedges at a profit and exit bond holdings in India.
The FX-triggered bond selling then led to rate-triggered selling by other foreign investors, followed by domestic asset managers and insurers who needed to cut their exposure to longer dated bonds, according to Marwaha's analysis reported by The Hindu BusinessLine. Nuvama expects India's benchmark bond yield to move in a range of 6.95% to 7.05% over the next one month and in a 7.05%-to-7.15% range over three months, with risks of further rise if El Nino hits monsoon rains.
Bond purchases by foreign investors for margin funding needs are adding to debt market volatility, with investors holding close to 70% of the equity trading margin in bonds and churning that portfolio, as reported by The Hindu BusinessLine. Limited supply of short-term bonds after the central bank's hefty purchases last fiscal year is also pushing up yields, with Marwaha noting that all short-dated bonds are in short supply and banks are trying to short these papers and sell them to foreign investors.
The yield on India's 7.37% 2028 bond, which is listed on three global bond indexes, jumped 75 basis points from March to mid-April despite the central bank assuring it was not thinking about rate hikes, according to The Hindu BusinessLine. It would take a significant rise in bond yields or a change in the rates outlook for investors to return to the market, Marwaha noted.
