In a significant development for the Indian bond market, foreign banks have purchased more than US$ 16 billion worth of Indian bonds in the first seven months of 2024. This marks a record-breaking surge that surpasses the total purchases made in the entire previous year, according to official data. This surge in activity has been largely attributed to India’s recent inclusion in the JPMorgan Emerging Market index last month, which has spurred increased interest and investment from international entities.

Market Dynamics and Expectations

Several traders have pointed out that there is a widespread expectation of better returns as interest rates are anticipated to decline. This outlook has been instrumental in driving the surge in foreign purchases. Additionally, the country’s banking system liquidity surplus reached a near one-year high this month, which has further boosted demand. This liquidity surplus is a crucial factor, as it provides the necessary environment for increased investment in bonds. Traders expect this strong demand to persist in the coming months.

Impact on Local Banks and Bond Supply

The continuous purchases by foreign participants are proving to be a relief for local banks. Typically, local banks are under pressure to absorb the bond supply, but with foreign banks stepping in, this pressure is alleviated. Foreign banks and foreign portfolio investors are particularly focusing on short-term bonds. This focus is expected to lower yields and steepen the yield curve. This trend is evident from the net purchases data, which shows that foreign banks have bought bonds worth US$ 16.38 billion (Rs. 1.37 trillion) in 2024. This figure represents nearly 20% of the year’s gross supply, based on data from the Clearing Corporation of India Ltd (CCIL).

Comparative Analysis with Previous Year

To put this into perspective, these purchases have already broken the record set in 2023, when foreign banks purchased US$ 14.58 billion (Rs. 1.22 trillion) worth of Indian bonds. The comparison underscores the growing confidence and interest of foreign investors in the Indian bond market.

Bond Yield Movements

The influence of these purchases is also reflected in the bond yield movements. The 10-year bond yield fell by 9 basis points (bps) in July, while the 5-year yield declined by 16 bps. These movements indicate a rally in the bond market, driven by the influx of foreign investment.

Expert Insights

Experts in the market have provided their insights on this trend. Mr. Siddharth Bachhawat, the head of markets at Barclays, emphasized the favorable macroeconomic conditions. He stated, “We retain our long-duration view. A strong macro backdrop, favourable demand-supply dynamics, growing foreign interest, and discretionary interest - all augur well.” This statement highlights the confidence in the long-term potential of the Indian bond market.

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Mr. Akshay Kumar, head of global markets, India, at BNP Paribas, pointed out the concentration of foreign bank buying in the shorter end of the curve. He noted, “I think foreign bank buying has been more concentrated in the shorter end of the curve, which is why that segment has rallied more.” This observation is crucial, as it explains the steeper decline in yields for shorter-term bonds.

Conclusion

The record-breaking purchase of Indian bonds by foreign banks in 2024 is a clear indication of the growing confidence in the Indian economy and its financial instruments. The inclusion in the JPMorgan Emerging Market index has undoubtedly played a significant role in attracting foreign investment. As interest rates are expected to decline, the demand for Indian bonds is likely to remain robust. This trend not only benefits the bond market but also provides a respite for local banks by sharing the burden of bond supply absorption.

The bond yield movements and expert insights further corroborate the positive outlook for the Indian bond market. With favorable macroeconomic conditions and increasing foreign interest, the Indian bond market is poised for continued growth and stability. The coming months will be crucial in determining the sustained impact of these investments and the overall trajectory of the market.

In summary, the record US$ 16 billion investment by foreign banks in Indian bonds in the first seven months of 2024 highlights a significant trend. It showcases the attractiveness of Indian bonds to international investors and sets a promising tone for the future. As market dynamics evolve, the interplay between foreign investments and local financial systems will continue to shape the landscape of the Indian bond market.

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