Portfolio inflows into Indian bond and equity markets have been the best ever in 2014, now totalling a massive $43 billion, data from the depositories show. Of these, the bond market has cornered more than half of the inflows as Indian bonds offer a clean spread of at least 6% on an unhedged basis to investors.
The interest rate differential between India and US, along with expectations that interest rates are headed down domestically, lured foreign investors towards Indian bonds. For instance, the yield on the 10-year benchmark 8.40%, 2024 bond was at 7.97% on Wednesday while the US 10-year treasury note was around 2.10%.
Given the strong demand by foreign investors, the limit of $25 billion in government bonds has been exhausted since August and foreign investors have been buying corporate bonds since then.
Between August and now, foreign investors have bought around $9 billion worth of corporate bonds. The investment limit in corporate bonds is $51 billion.
Inflows into equities, the traditionally strong point of investment, was just $17 billion so far in 2014.
However, foreign investors were net sellers of bonds and equity on Monday and Tuesday, after a gap of three weeks. This selling mirrored the risk aversion towards emerging markets this week.
However, inflows could resume, given the optimism the current Central government enjoys along with steadily improving macroeconomic data, according to bankers. “With India’s economic outlook improving, once global conditions become more amenable, flows too will likely improve,” said Macquarie Research in a report.
Bankers believe that among emerging countries, India will have the edge due to political stability and expectations of an improving economic growth as reforms kick in.
“We cannot rule out outflows or a probable stopping of inflows, but, right now, it does not seem that way since India story is still strong,” Ashish Parthasarthy, head of treasury at HDFC Bank.
The current government has expedited clearances of projects, the key reason for a drag in the economic growth in 2013-14. Global liquidity is expected to stay abundant as accomodative policy in Japan and eurozone will offset the reining in of quantitative easing by the US.