Foreign Ownership of Indian Bonds Surges Ahead of Anticipated Rate Cut

Foreign holdings of Indian government bonds have crossed 3 trillion rupees ($35 billion) for the first time, Reuters reports. This surge comes as investors anticipate an interest rate cut by the Reserve Bank of India (RBI) 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, to Reuters.

The RBI is expected to cut its policy rate for the second time since February on April 9. Overnight index swap markets have already begun to price in more aggressive rate cuts.

Interest rate cuts would lead to a drop in bond yields, resulting in capital gains for bondholders. This expectation has fueled the recent surge in foreign investment in Indian bonds.

Foreigners have purchased 124 billion rupees of bonds in the last two weeks of March, a significant increase from the 40 billion rupee purchase in the first two weeks of the month.

Most of the bonds under the Fully Accessible Route (FAR), which allow investments outside of capital-flow limits, are included in global bond indexes. Overseas ownership of these notes has doubled in the last 14 months, reaching nearly 7% as of March 27.

The two-year and eight-year bonds are the most popular among foreign investors, with ownership exceeding 15% and 14%, respectively.

Manish Bhargava, CEO of Straits Investment Management, expects a cumulative rate cut of 50-75 basis points this year, further encouraging foreign investment in Indian bonds.

"There has been an increase in inflows in bonds given the RBI is widely expected to cut rates by 25 basis points next month," Bhargava added.

India's retail inflation fell to a seven-month low of 3.61% in February, supporting the expectation of an interest rate cut.