India's index-linked bonds see record foreign selling in May on profit-booking, currency swings
Foreign investors sold Indian government bonds included in global indexes for a second straight month in May, driven by profit-taking and currency volatility rather than a change in sentiment towards the country, several investors said.
ADVERTISEMENT Foreign investors offloaded 123.2 billion rupees ($1.44 billion) of Indian bonds under the Fully Accessible Route in May, the highest since its 2020 launch, after selling 111.4 billion rupees in April.
They have invested 1.20 trillion rupees in Indian bonds till March since June 2024, when Indian bonds were included in the JPMorgan emerging debt market index.
"The recent outflows are best viewed through the lens of profit-taking after a strong run, rather than a shift in fundamental conviction," said Rong Ren Goh, portfolio manager at Eastspring Investments, which manages $256 billion of assets. Some headwinds, including geopolitical tensions and uncertainty over the new RBI governor's stance on FX policy, may have also led investors to trim exposure and rebalance portfolios, he added.
The Indian rupee has grown more volatile over the past six months since new RBI Governor Sanjay Malhotra took charge in December, with implied volatility averaging 4.26%, up from 2.24% during the final six months of former governor Shaktikanta Das's tenure.
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A rise in U.S. Treasury yields due to fear of a wide budget gap and inflationary impact of President Donald Trump's tariff policies and a drop in Indian rate due to declining inflation have also narrowed the yield differential between the two markets.
The spread between Indian and U.S. bond yields have collapsed to 21-year low of around 170 bps now, from 250 bps early November.
ADVERTISEMENT "This (selling in Indian bonds) was not driven by skepticism towards India, but rather by shifts in global macro sentiment," Jean-Charles Sambor, head of emerging markets debt at TT International Asset Management said, that manages $3.15 billion of assets across EM. "We do not see this (outflows) as a game changer. Sentiment towards Indian bonds is likely to improve as inflation continues to decline and there is more fiscal space," Sambor said, adding he remains constructive on rupee bonds and believes appetite for local currency bonds is returning. ($1 = 85.3790 Indian rupees)
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