Foreign investors have significantly increased their purchases of Indian government bonds, investing over $1 billion in just four sessions. This surge comes in the wake of weaker-than-expected economic growth data, fuelling hopes that the Reserve Bank of India (RBI) may soon ease monetary policy to support the economy.
A Renewed Interest in Indian Bonds
Data from the Clearing Corporation of India reveals that foreign investors have net purchased bonds worth over ₹90 billion ($1.06 billion) under the Fully Accessible Route (FAR) until Wednesday. A substantial portion of these bonds is part of JPMorgan’s debt index, further bolstering their appeal to global investors.
This buying spree marks a reversal from most of November, during which foreign investors were net sellers of Indian bonds. The sell-off was driven by high U.S. yields following Donald Trump’s victory in the presidential election, which cast doubts on the Federal Reserve’s easing trajectory. However, the recent GDP data, coupled with expectations of RBI action, has shifted sentiment back in favour of Indian debt.
Economic Indicators Point to Easing
The weaker GDP numbers released last week have heightened expectations that the RBI may take action to stimulate the economy. This anticipation has led to a decline in Indian bond yields, with the 10-year yield hitting a three-year low. The spread between the 10-year yield and the repo rate has also fallen to a seven-year low, signalling increased confidence in monetary easing.
“The market is viewing bonds favourably, likely due to expectations of policy easing, which has encouraged foreign inflows,” said Dhiraj Nim, an economist and FX rates strategist at ANZ.
The RBI is set to announce its policy decision on Friday, and market participants are closely watching for signals of easing. Most analysts expect the central bank to lower the cash reserve ratio (CRR) for banks, currently at 4.5%. A reduction of 50 basis points in the CRR could inject approximately ₹1.1 trillion into the banking system, further driving demand for bonds.
Debating the Next Steps
While a CRR cut appears to be the consensus expectation, some investors and analysts believe the RBI might go further by considering an outright interest rate cut. “I am in the rate cut camp for tomorrow’s meeting. The economy is already in a negative output gap, and there are serious downside risks to growth, even if this is just a cyclical slowdown,” said Nim.
The weak GDP data suggests that the Indian economy is operating below its potential, leading to speculation that the RBI may act sooner rather than later. “The GDP numbers indicate economic slack, prompting both foreign investors and banks to anticipate that the RBI could pause or reduce rates to support growth,” said Manish Bhargava, CEO of Straits Investment Management.
Attractiveness of Indian Bonds
Beyond rate cut expectations, Indian bonds remain an attractive investment due to their favorable yields and the relative stability of the Indian rupee. In recent weeks, the rupee has seen the least depreciation among emerging market currencies, adding to the appeal of Indian assets.
While rate cut prospects are driving much of the demand, the combination of high yields and a stable currency provides an additional incentive for global investors to increase their exposure to Indian debt.
The Road Ahead
As the RBI prepares to announce its policy decision, all eyes are on its next move. Whether the central bank opts for a CRR cut, a rate reduction, or both, the implications for the bond market and the broader economy will be significant. For now, foreign investors are clearly betting that the central bank will take decisive action to address the current economic slowdown.