Foreign holdings of India's index-linked bonds tumble to over 4-month low

Foreign money continues to flow out from the Indian bond market, with exposure to index-eligible notes falling to a more than four-month low, as high crude prices, US Treasury yields and uncertainty over the domestic rate outlook dent demand.

In October, overseas investors have sold a net 52 billion rupees ($546.3 million) of bonds under the so-called fully accessible route, which allows unfettered entry and exit, after selling 106 billion rupees in September, clearing house data showed.

Foreign holdings in such securities, which are eligible for inclusion in three global emerging-market bond indexes, have fallen to 3.57 trillion rupees, the lowest since June 17.

”We remain broadly neutral and cautious in the near term,” said Norbert Ling, head of fixed-income portfolio management for Asia-Pacific at Invesco.

”Near-term caution is warranted given elevated oil prices, spillovers from developed-market yields, uncertain foreign flows, potential RBI liquidity absorption, and additional government-bond supply.”

Brent crude has risen nearly 12% this month to near $115 per barrel, after jumping more than 14% in September. The 10-year US Treasury yield has risen more than 25 basis points over the past two months.

The Reserve Bank of India raised its policy rate earlier this month in its first such move in almost four years, and also hinted at more hikes in future. The rupee has been weak and the 10-year bond yield has jumped almost 30 bps in October.

Foreign investments had surged in June, when overseas investors bought a record amount of debt after authorities announced tax relief and eased investment flexibility.

”The structural outlook for inflows improved following tax reforms, which increased the realised rate differential available to international fixed-income investors,” said Stephen Chang, managing director and Asia portfolio manager at PIMCO.

”However, much of that optimism is already reflected in valuations.”

Investors are still constructive on Indian debt over the long term, given robust economic growth and improved market access. ”We would prefer to add duration during periods of externally driven weakness,” Invesco’s Ling said.

($1 = 95.1875 Indian rupees)