Rupee finds reprieve as foreign investors seek domestic assets: report

Rupee finds reprieve as foreign investors seek domestic assets: report

Mumbai:

A six-month exodus of foreign investors from Indian bond markets appears to have come to an end this month, giving the battered rupee some much-needed respite.

The return of these investment flows has occurred alongside a slowdown in global oil prices and domestic inflation, and expectations that a lower oil import bill will help reduce the country’s record trade deficit. country.

Foreign investors bought government bonds for nearly 40 billion rupees ($501.70 million) on a net basis between Aug. 1 and Aug. 17, according to data from Clearing Corp of India.

They had been net sellers between February and July, offloading bonds worth a total of 173 billion rupees as the US Federal Reserve and India’s central bank embarked on an aggressive rate hike cycle to fight inflation. .

“Signs of slowing inflation, the outlook for lower oil due to slowing global demand and slowing China and manageable deficits are factors that will likely encourage capital inflows to continue in the near term. “said Kunal Sodhani, Vice President of Global Trading Center at Shinhan Bank.

High yields, coupled with expectations that lower prices will allow the Reserve Bank of India (RBI) to be less aggressive on policy, also helped attract investors.

“Some people previously expected the terminal repo rate to be as high as 6.50%, but those expectations have come down, and we could see a terminal rate around 6.00%, which is also a factor. which could contribute to more foreign inflows,” said Nandan Pradhan, deputy managing director, treasury, at Cosmos Bank.

The RBI’s monetary policy committee has so far raised the bank’s key rate three times in four months, taking it to 5.40% and pushing 10-year yields up 82 basis points this year to 7.27%.

The comparative yields in South Korea and Indonesia are 3.31% and 7.09%, respectively.

Foreign investment in Indian stocks has also returned, with purchases of around $5 billion through August 17, according to data from National Securities Depository Ltd, after foreigners sold nearly $27.70 billion. dollars worth of stocks between January and July.

The flows came just after the rupee hit a record high when it slid to the weaker side of 80 to the dollar in July, a factor the RBI highlighted in its bulletin this week, with a caveat on the “inconstant flows”.

“The tightening of global financing conditions as monetary policy is preloaded is expected to … worsen the outlook for portfolio flows,” the RBI wrote.

MORE FLOWS EXPECTED

Another big draw has been the possibility of Indian bonds making it into global bond indices, which Goldman Sachs analysts Danny Suwanapruti and Santanu Sengupta flagged in a recent report.

Goldman expects India to be included in global bond indices in 2023, leading to passive inflows of around $30 billion. That’s nearly double the $18 billion in government bonds that foreigners currently hold.

Similar talks about inclusion in January, ahead of the annual federal budget, had attracted about 60 billion rupees inflows from foreign portfolios into bonds that month.

“Absolute returns have risen in India, foreign portfolio investors have very limited ownership of Indian bonds. The Rupee has also moved towards the right end of the predicted trading band (i.e. depreciated) and all of these could be cases for allocating money to fixed income,” said Lakshmi Iyer, chief investment officer for debt and core products at Kotak Mutual Fund.

Still, a Reuters poll in early August showed nearly 50% of 40 analysts polled expect the partially convertible rupee to stay near its all-time high over the next three months.

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