Stable rupee drives surge in foreign investors’ demand for government bonds

Government bonds in demand: The stability of the rupee has emerged as a key factor fuelling increased foreign inflows into the country's government bond market, with experts foreseeing sustained investment momentum as India's debt is incorporated into global indexes.

Since JPMorgan's announcement on September 21 that India would be added to its emerging market index, foreign portfolio investors have significantly augmented their holdings of Indian government bonds, marking a nearly 50 per cent surge. The decision by Bloomberg Index Services last week to include Indian bonds from 2025 further buoyed investor sentiment.

Approximately Rs 81,500 crore worth of Indian government bonds have been acquired by overseas investors since these announcements. The rupee has exhibited stability, registering its lowest volatility levels in nearly two decades in 2023 and emerging as the best-performing Asian currency this year.

Kenneth Akintewe, head of Asian sovereign debt at abrdn in Singapore, attributes India's allure to its currency stability, contrasting it with the higher volatility observed in other emerging market currencies. He stressed on India's favourable risk-adjusted returns, with the fund house boasting an exposure of approximately $500 million to Indian government bonds.

Data from the National Securities Depository revealed that foreign banks and investment managers spearheaded bond purchases in the past five months, with major increases in holdings witnessed among global central banks and sovereign wealth funds.

Neeraj Seth, Chief Investment Officer and Head of APAC Fundamental Fixed Income at BlackRock, underscored the appeal of Indian bonds post-hedging, facilitated by the stability of the currency. Seth highlighted the diverse hedging tools available to investors in the backdrop of a stable rupee.

Wontae Kim, a research analyst at Western Asset Management, identified macro fundamentals and minimal political risks as additional factors contributing to India's attractiveness. Kim expressed confidence in the opportune moment to venture into Indian government bonds, emphasizing Western Asset's overweight position in duration, with exposure to Indian debt across its funds amounting to approximately $330 million.

(With Reuters inputs)