Surge in foreign investment boosts government bonds

The last quarter of 2023 witnessed a remarkable surge in foreign investment within government bonds, predominantly spurred by JPMorgan's decision to include the debt in its indexes, driving inflows to a six-year pinnacle. Overseas investors accrued government bonds worth Rs 350 billion ($4.2 billion) during October–December, propelling the annual total to Rs 598 billion, marking the highest since 2017, according to data from the clearing house.

The trajectory of these investments appears promising, with fund managers anticipating further influxes in the New Year. Jean-Charles Sambor, Head of Emerging Markets Fixed Income at BNP Paribas Asset Management, expressed optimism for India's prospects in 2024, foreseeing inflows into the local currency asset class. Sambor highlighted the prospects of containing India's inflation and well-controlled fiscal risks, coupled with potential rate cuts by the Federal Reserve, potentially driving the 10-year benchmark bond yield below 7 per cent.

JPMorgan's decision in September to incorporate select bonds into its 'Government Bond Index-Emerging Markets' and index suite by June anticipates an additional $25 billion influx into bonds, analysts predict. As a result, India's 10-year benchmark bond yield currently hovers around 7.20 per cent, having declined by 15 basis points in 2023, a reversal from the previous year's surge triggered by global monetary policy tightening.

With the Federal Reserve signalling readiness to lower interest rates in 2024, coupled with expectations of a similar move by the Reserve Bank of India (RBI), experts predict a sustained influx in bond investments, possibly amplified by aggressive rate cuts, enhancing yield differentials, according to Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies. Forecasts suggest a potential 100 to 150 basis point rate cut by the Fed and at least a 50 basis point reduction by the RBI in 2024.

The current trend shows the US 10-year bond yield hovering around 3.85 per cent, anticipating rate cuts, resulting in a widened spread of around 335 basis points compared to its Indian counterpart of 240 basis points in late October. The fully accessible route for Indian bonds experienced a substantial surge in late 2023, with foreign holdings doubling from the previous year to Rs 1.3 trillion, as reported by the clearing house data.

(with Reuters inputs)