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A surprise bond rally sweeps over India as global funds pile in

A surprise bond rally sweeps over India as global funds pile in

06 Sep 2021

By Subhadip Sircar

A rally in India’s sovereign bonds, fueled by mutual funds and overseas investors after weeks of indifference, has left most Mumbai traders baffled at their sudden fortune.

Yields dropped across the curve last week, with those on the benchmark 10-year bond declining ten basis points, the biggest weekly drop since April. Government debt auctions are finding buyers again, after a spate of earlier sales were canceled or rescued by underwriters.

“The sudden demand is surprising,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank Ltd. “The lower inflation trajectory for the next two months and global factors are supporting this.”

814x-1 (57)Bloomberg

The quick turn in sentiment came after the benchmark 10-year yield rose to its highest since March, accentuated by a Reserve Bank of India policy review held on August 6, where one member dissented on the accommodative stance. The subsequent minutes showed more members had indicated excess liquidity could be whittled down. While many traders have been left wondering about the market turnaround, others suggested that lower-than-expected growth for the June quarter and expectations of benign inflation in the coming readings may have nudged investors to recalibrate.

Mutual funds turned net buyers with purchases of 151 billion rupees ($2.1 billion) of debt over the last 10 trading days, data compiled by Bloomberg shows. Foreigners were also lured back after a long break following a sharp rally in the rupee.

Overseas investors picked up 28.2 billion rupees of bonds under the so-called Fully Accessible Route, where there are no caps on foreign purchases, and 15.2 billion rupees under the general category since the last week of August. A special route for long-term foreign investors called the Voluntary Retention Route, also suddenly saw all its 906 billion rupee quota taken up.

While the GDP release on August 31 helped, it’s likely that comments by Federal Reserve Chair Jerome Powell at Jackson Hole reassured global investors that the US central bank would be gradual in removing stimulus. That has boosted risk sentiment globally.

“The GDP numbers triggered the change in sentiment and show RBI will continue with its extended accommodative stance,” said Vikas Goel, chief executive at PNB Gilts Ltd. “I do not expect any hike in the reverse repo this year.”