Foreign investors ramped up purchases of Indian government bonds by 46 times last week, an indication that aggressive currency intervention by the central bank is building market confidence.
Global funds bought 55.51 billion rupees ($631 million) of debt accessible to foreigners last week, according to Clearing Corporation of India Ltd. data, compared with 1.21 billion rupees in the prior week. The currency surged nearly 1% last Wednesday after the Reserve Bank of India went on the offensive against rupee bears. The RBI sees the rupee under speculative attack and is prepared to intervene further until it settles at a stronger level, according to people familiar with the matter.
The RBI’s intervention has lifted the rupee from near-record lows and improved the returns on Indian bonds, which are on track to beat their emerging market peers for a second straight month. The 10-year yield is at around 6.5%, among the highest in the region.
“Given the relatively high yield levels offered by onshore rupee bonds, a steady or even appreciating rupee is certainly very positive news,” said Yifei Ding, senior portfolio manager for fixed income at Invesco Hong Kong Ltd. A strong rupee will attract more investors into Indian government debt, Ding said, as they can benefit from the high carry — gains from holding high yield assets.
Rupee gains ground
The rupee gained by the most in four months for the five days through Friday, as the central bank waded into both offshore and onshore markets. That’s helped narrow the rupee’s year-to-date losses against the dollar to 2.6% — it is still the worst-performing Asian currency after the Indonesian rupiah.
Rupee-denominated bonds have returned 1.9% to investors so far in October, compared with 0.2% for a broader Bloomberg gauge of local emerging-market debt. Potential currency gains, on top of relatively high yields, continue to draw investors.
While pressure from US tariffs and the central bank keeping interest rates steady had pushed yields higher earlier, easing inflation and the prospect of monetary easing now offer fresh support for Indian debt. Yields on the benchmark 10-year bond eased seven basis points this month after rising 25 basis points in the September quarter.
“Recent rupee-negative factors are sufficiently priced in, so we welcome very much the actions of RBI,” said Carl Vermassen, a portfolio manager at Vontobel Asset Management AG, which has India as the largest position in its sustainable emerging markets local currency bond fund. The rather cheap currency, sufficient real rates and de-correlated nature of the Indian market all work in favour for assets like sovereign bonds, he added.
To be sure, sentiment could flip if the rupee weakens again on renewed trade frictions. Any pullback in central bank support may erode recent optimism.
“If there are positive developments on the trade front, the rupee could trade much better than it has in recent months,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Investments. The rupee could be more competitive against other regional currencies and combined with returns from the underlying bonds, the country warrants an overweight, he said.