Mumbai: Foreign investors are selling into India’s world-beating bond rally as they seek to reduce exposure to emerging-market assets amid rising odds of a Federal Reserve interest-rate increase next month.
Overseas holdings of rupee-denominated government and corporate notes fell by Rs69.9 billion on Wednesday, the most in single-day National Securities Depository Ltd data compiled by Bloomberg going back to 2013. Benchmark 10-year sovereign yields on Wednesday capped their biggest two-day slide in three years as slowing inflation boosted the case for further monetary easing just as a banking system awash with cash spurs demand for debt locally.
Fed chair Janet Yellen is due to address Congress for the first time since Donald Trump’s surprise victory in the 8 November presidential election that spurred speculation his fiscal stimulus plans will quicken the pace of rate hikes. Odds the Fed will tighten policy in December have risen to 94% from 68% at the start of this month.
Prime Minister Narendra Modi’s shock withdrawal of 86% of the nation’s currency notes in circulation has seen banks draw about the equivalent of $48 billion in deposits as people across Asia’s third-largest economy rush to submit the old bills. The gush of funds flowing into the financial system is seen boosting debt demand.
“The current sell-off is largely driven by a reduction in allocation to emerging-market assets, including bonds,” said Rajeev De Mello, who oversees about $10 billion in Singapore as head of Asian fixed income at Schroder Investment Management Ltd. “Domestics are probably positive following the demonetization,” as the boost to liquidity and expected lower inflation make bonds attractive, he said.
The yield on government notes due September 2026 fell one basis point to 6.44% as of 12.25pm in Mumbai, according to prices from the central bank’s trading system. It plunged 28 basis points in the last two days.
Overseas holdings of rupee debt have dropped in each of the last three sessions, taking outflows in the period to Rs104.9 billion. Foreigners have pulled out $902.9 million from local shares this month.
The rupee rose 0.1% to 67.9125 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It plunged 2.2% in the last four days. Bloomberg