FAR G-Secs: FAR G-Secs fare better in Jan, but yields in US, dollar cloud outlook

The inflows which had peaked at over ₹22,000 crore in August have tapered due to escalating US yields and a depreciating rupee making Indian government bonds less attractive to foreign portfolio investors, fixed income experts said.

The market will now be keenly watching the inflows after India is included in the Bloomberg Emerging Market local currency government index on January 31, traders said.

Index-eligible bonds saw outflows in October and November 2024, while inflows into these securities, even though sluggish, again started in December.

Fund managers do not anticipate significant inflows into index-eligible bonds, due to an uncertain global environment as assets under management in global emerging market indices have been declining.

“AUMs of global EM debt funds have been shrinking due to higher yields in the US, and prospects of stronger dollar for a longer time. Therefore it is difficult to price in strong flows into Indian bonds yet. Yield differentials of India and the US are very narrow – it just offsets the inflation difference and does not give any additional returns,” said Abhishek Upadhyay, senior economist-fixed income strategy at ICICI Securities Primary Dealership.The 10-year US bond yield was trading at 4.51% on Thursday, while the 10-year Indian government bond yield closed at 6.68%.In the overall share of funds, foreign investors have shifted a large proportion of holdings towards the longer tenure securities, in anticipation of a rate cut. The share of funds invested in debt maturing in 10 years or more has risen steadily.

Despite the current uncertain environment, fund managers would not want to go massively underweight in India for a longer term, as India provides better diversification benefits than other countries in the EM bucket, Upadhyay said.

Foreign portfolio investors (FPIs) also think that India’s long-term prospects remain attractive due to stronger fundamentals, and would be waiting for an opportunity to enter the Indian bond market in sync with a largely stable currency and global environment.

“In the current scenario, a depreciating currency and dynamically evolving global factors affect the calculations of investors, and so they may wait for more clarity. FPIs would be looking for opportunities to enter and they would want to time it with a stable external environment,” said Nitin Agarwal, head of trading at ANZ Bank.

JPMorgan had estimated $20 billion to $25 billion of inflows over a 10-month period starting in late June to March when India would reach its full 10% weightage in the EM Index. As of now, FAR securities have seen inflows of about $8 billion.