Resurgence of India rate-cut wagers revives foreign investor interest in bonds

Reuters

6 days ago

MUMBAI, July 22 (Reuters) - Foreign appetite for Indian government bonds is back, with inflows picking up steadily over the last month, as investors gauge fresh expectations of a rate cut by the Reserve Bank of India as early as August.
The RBI cut rates by a larger-than-expected 50 basis points in June and changed the stance to "neutral", prompting investors to bet on a prolonged pause.
But a sharp drop in June retail inflation has some investors reassessing the likelihood of another rate cut.
The RBI could implement a modest 25 basis point cut in August if inflation remains subdued and growth concerns persist, said Singapore-based Manish Bhargava, CEO of Straits Investment Management, adding that bond yields are attractive at current levels.
Over the last one month, foreign investors have net bought 129 billion rupees ($1.5 billion) of Indian bonds linked to global indexes after selling more than 330 billion rupees in the first two-and-a-half months of the financial year that started on April 1, clearing house data showed.
Analysts said concerns on the growth front are also likely to prompt the central bank to lower rates further.
With recent high-frequency data disappointing and indicating the possibility of a further slowdown in growth, "there is potential for more support from the RBI further down the line," said London-based Giulia Pellegrini, lead portfolio manager, emerging market debt at AllianzGI.
India's overall economic fundamentals remain solid, keeping the country on investors' radar, she said.
A wider gap between interest rates in India and the U.S. would add to the appeal of Indian debt, investors said.
That's why a Federal Reserve rate cut could act as a positive catalyst for Indian bonds, as they have historically helped local currency debt markets, said Nigel Foo, Singapore-based head of Asian fixed income at First Sentier Investors.
However, current Indian bond yields are lower than where they were in the past at similar policy rate levels, and so are relatively unattractive, he added.
The 10-year U.S. yield was around 4.35%, with the Fed expected to cut rates by at least 50 bps in 2025. The Indian 10-year benchmark bond yield was at 6.30%.
"India's local debt story remains very compelling on both FX and rates," said Jean‑Charles Sambor, head of emerging markets debt at TT International Asset Management in London, who expects bond yields to decline through this year and next, and finds the middle of the yield curve attractive.
($1 = 86.2470 Indian rupees)