India’s bond rally unlikely to lure global funds: PineBridge

The gains in Indian bonds sparked by the central bank’s measures to ease the market’s debt-supply burden will peter out soon and foreigners are unlikely to buy unless government finances improve, according to PineBridge Investments.

“The gap in the government’s budget needs to be filled for foreign investors to return over the long-term,” said Anders Faergemann, a London-based senior money manager at Pinebridge. Weak growth “tends to undermine any hope of a turnaround in the fiscal picture, and as a result, the RBI’s measures will only work to support the bond market temporarily.”

India’s benchmark 10-year bond is set for its best performance this week since January last year after the Reserve Bank of India announced a slew of measures including tweaks to banks’ accounting method to spur demand for government debt. RBI’s move came just as yields rose to the highest in four months on concerns over the government’s record ₹12 trillion ($164 billion) issuance plan.

That’s hardly improved foreigners’ appetite for Indian debt. Global holdings of Indian bonds continue to linger near a record low of ₹92,500 crore. The prospect of the budget deficit widening to more than double the original estimate, along with concerns of a sovereign rating downgrade to junk has kept foreigners away from one of Asia’s highest yielding debt.

Pinebridge’s Anders expects RBI’s steps to provide short-term relief. “We expect the upward trend in local bond yields to resume once the positive technical backdrop has cleared,” he said.