Pension and sovereign funds, which typically use the voluntary retention route (VRR) to buy bonds, have sold local debt securities worth around $900 million so far in 2022, according to the data compiled by the ETIG. During the same period last year, foreign portfolio investors (REITs) bought $1.16 billion worth of Indian debt.
The VRR imposes a minimum ownership of three years.
“Even though the central bank hasn’t changed the policy rate or its stance, yields are clearly on the rise,” said Soumyajit Niyogi, head of India Ratings. “Over the next one to two years, global rates markets are expected to see high volatility, although India would be much better prepared. But the impact on domestic interest rates cannot be isolated.”
Foreign investors are looking to buy dollar-backed assets as central banks on both sides of the Atlantic reverse ultra-loose monetary policies in a coordinated exercise to drain excess liquidity.
“Volatile macros weigh on institutional investors seeking the safety of dollar-backed assets as the US Treasury surges amid geopolitical uncertainties,” Niyogi said.
The pace of selling appears to have picked up after the Reserve Bank of India (RBI) signaled it may join its peers in their collective battle against runaway inflation. From a policy approach hitherto focused on supporting growth, the RBI shifted the focus to inflation in its April bi-monthly review, citing high global commodity prices.
Since April 7, a day before the RBI’s policy announcement, foreign investors have sold $212 million in net debt through Monday, about a quarter of the debt sold over the year until now.
“It’s a combination of the global phenomenon and the local rate sentiment,” said Madan Sabnavis, chief economist at Bank of Baroda. “There may be a turnaround once the RBI raises rates as long-term investors who are there to hold bonds to maturity will reconsider options.” In 2021, REITs bought about $3.86 billion in net debt, up from $3.25 billion a year earlier.
“But given the current account gap and a weaker rupee trend, the amounts at stake might not be very large this year,” Sabnavis said, referring to likely short-term investments by funds. strangers.
The deficit widens
India’s current account deficit (CAD) widened to $23 billion in the December quarter, totaling 2.7% of the country’s gross domestic product (GDP).
“The current scenario clearly reflects that after more than a decade, the yield advantage of Chinese government bonds over the 10-year US Treasury no longer holds true in nominal terms,” said Sriram Krishnan, CEO of Deutsche Bank. . “The hardening of bond yields is currently in the news and is mainly attributable to the war, rising inflation, the increase in US Fed rates and higher oil prices.”
Rapidly widening trade and current account deficits and portfolio capital outflows could weigh on external sustainability, according to a central bank report, although “the strength of underlying fundamentals and the stock of international reserves provide buffers “.
“The good news is that we are reasonably well positioned as a country to deal with this situation, and there are several options available to the RBI and the Ministry of Finance,” Krishnan said.
The interest rate derivatives market is already pricing in aggressive rises this year and next. Overnight interest rate swaps (OIS) point to a likely cumulative increase in rates of 2 percentage points over this period, ET reported on April 18.
The central bank introduced the VRR plan for REIT investments on March 1, 2019. So far, an amount of Rs 1.5 lakh crore has been offered for investment under the three-tranche VRR arrangement. With the limit exhausted, the cap was raised to Rs 2.5 lakh crore earlier this month.