Government bonds face FPI selloff as US yields harden
Indian government bonds has met with a sudden trend reversal after persistently firm American economic data reduced visibility on rate cuts by the Federal Reserve, causing a surge in US bond yields and reducing the allure of emerging-market debts.
Adding to the sudden reversal in foreign buying interest in bonds is the rise in crude oil prices over the past few weeks due to concerns of tighter supply and a recent flare-up in Middle East tensions. A higher trajectory for crude oil prices imparts uncertainty to the outlook on India's inflation and trade deficit.
«The cocktail of rising oil prices, strong dollar and repricing of Fed's path leading to higher US yields is behind the debt selloff in India… since index-inclusion related passive flows will only begin in June, till then, the reactions of the 'front-runners' and BAU (business as usual) investors will continue to dominate,» said Dhiraj Nim, FX strategist at ANZ.
From March 21 to April 16, FPI holdings of Fully Accessible Route (FAR) government bonds have declined by ₹9,873.71 crore to ₹1.66 lakh crore, latest data released by the Clearing Corporation of India showed. FPI holdings of FAR government bonds had increased from ₹94,416.14 crore as on September 21 to ₹1.77 lakh crore as on March 21. On September 21, JP Morgan had announced inclusion of Indian bonds in its emerging market bond index from June 2024, sparking a rush amongst foreigners to stock up on local debt, especially those looking to reap quick price gains.
According to Arete Capital's
