Foreign funds sell FAR debt after 3 months of large buys

Mumbai : Overseas buying into Indian bonds through the fully accessible route (FAR) reversed in October — a month in which US benchmark yields advanced more than half a percentage point — after three months of significant purchases that came in the immediate aftermath of the inclusion of local sovereign debt in a keenly tracked global gauge.

FAR bonds saw outflows worth $333.7 million for the first time in October since the inclusion of the debt category in the JP Morgan bond index on June 28, CCIL data showed. This is because investors have turned riskaverse, ahead of the US presidential elections with a corresponding rise in US treasury yields, economists said.

“Right now, the markets are in a wait-and-watch mode. Once clarity on elections and the US Federal Reserve rate cut emerges, we would expect index inflows to resume in India,” said Anubhuti Sahay, senior economist at Standard Chartered Bank. “Our estimate of $20 billion to $25 billion of inflows throughout the whole index inclusion phase is still intact. At the most, there would be some shortfall to it but we do expect inflows to come back.”
In July, the value of foreign portfolio investor (FPI) holdings in FAR bonds rose by $2.5 billion, followed by an increase of $2.84 billion in August and $2.13 billion in September, the data showed.

Uncertainty over US Fed, Poll Results
The tepid interest seen in October by FPIs in Indian government bonds stems from factors such as a stronger dollar index, higher bond yields and stronger economic data in the US, factors that have combined to reduce expectations of another outsized rate cut by the US Federal Reserve soon.

Uncertainty on the outcome of the US elections has also caused investors to sell these securities, as election results may be delayed due to a tight contest between the candidates, Reuters reported Thursday.

Stronger economic data in the world’s largest economy has also caused markets to factor in a smaller quantum of rate cuts by the Federal Reserve. The non-farm payroll (NFP) data for September showed the biggest jump in six months, with more than 254,000 jobs, versus expectations of 140,000 jobs. The NFP data for October is expected on Friday, November 1.

The NFP data is one of the most important variables considered by the Federal Reserve when it comes to deciding on the trajectory of interest rates.
Uncertainty from the US elections and strength in the dollar index have also led market participants to believe that the total assets under management of the JP Morgan Emerging Markets index may decrease, as the inflow of passive funds into the index may drop.

“It will be interesting to see how passive flows evolve over the next few months. If there is a further rise in US yields, and the dollar index is strong, which may get a further leg up with the election outcome, in that case, it can also be that passive flows may be less than what we had estimated. But this will be clearer after the election results are out and the policies that are implemented,” said Abhishek Upadhyay, senior economist, Fixed income strategy, ICICI Securities Primary Dealership.

The 10-year US treasury bills were trading at yields of 4.27% on Thursday, according to Reuters, versus 3.73% on October 1. Yields of the Indian 10-year government security rose to 6.84%, versus 6.73% on October 1.
Bond yields and prices move inversely.