By Dharamraj Dhutia
MUMBAI (Reuters) – Foreign holdings of Indian government bonds that allow unfettered investment have risen to more than 3 trillion rupees ($35 billion) for the first time as investors stepped up purchases ahead of an anticipated interest rate cut in April.
Foreign inflows might see a further rise amid “an aggressive rate cutting cycle on growth/trade headwinds and well-behaved inflation as well as a stable currency,” said Sabrina Jacobs, senior client portfolio manager, emerging market fixed income at Pictet Asset Management.
On April 9, the Reserve Bank of India (RBI) is expected to cut its policy rate for the second time since February. The overnight index swap markets have started pricing in far more aggressive rate cuts.
Interest rate cuts would lead to a drop in bond yields, resulting in capital gains.
With just one session to go before the fiscal year ends, foreigners have bought 124 billion rupees of bonds in the last two weeks of March, up from the 40 billion rupee purchase in the first two weeks, data showed.
Most bonds under the Fully Accessible Route (FAR), which allows investments outside of capital-flow limits, are included in global bond indexes. Overseas holding of these notes has doubled in the last 14 months, with the ownership rising to nearly 7% as of March 27.
The two-year and eight-year papers are most preferred, with foreign ownership at 15.3% and 14.7%, respectively.
Meanwhile, Manish Bhargava, CEO of Straits Investment Management, sees a cumulative rate cut of 50-75 basis points this year.
There has been an increase in inflows in bonds given the RBI is widely expected to cut rates by 25 basis points next month, he added.
India’s retail inflation had dropped to a seven-month low of 3.61% in February.
($1 = 85.6100 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Sumana Nandy)
