Bonds sold off on Tuesday following fears that a drop in the rupee might entice foreign portfolio investors (FPIs), who have avoided selling Indian debt despite the global turmoil, to exit their positions. The 10-year benchmark yield rose to a two-year high, surging nine basis points from Friday’s close to end the session at 7.67%. During the day, the yield surged to a high of 7.695%. Despite the sell-off in the domestic bond market, foreign investors continue to hold on to their positions. Market participants believe if the currency continues to depreciate, FPIs might change their stance and exit their positions in Indian debt. “This fear could have led to some selling on Tuesday,” said a G-sec dealer. FPIs have so far bought $1.85 billion worth of Indian bonds on a net basis this year. Another reason the market attributes to the sell-off is the prevailing negative sentiment led by rising US Treasury yields and less participation by the public sector banks.
The 10-year US Treasury yield is hovering close to a 4-year high of 2.9% even as a massive debt auction worth $258 billion is set to hit the US markets this week and the Federal Open Market Committee (FOMC) is set to release the minutes of its meeting. Although the direct impact of the rising US Treasury yields could be limited, fears do persist on possible outflows from the Indian market if borrowing costs rise for FPIs. Furthermore, public sector banks have reduced their buying in the government securities market. Ananth Narayan, professor-finance at SPJIMR points out that Indian banks’ appetite for bonds has been killed by staggering mark-to-market losses and RBI’s admonishment earlier this year.
“This has resulted in a sharp drop in market volumes and interest. Globally, investors are probably nervous about India’s worsening macros — rising twin deficits, uncertain inflation trends, and possible political uncertainty. Withdrawal of global monetary accommodation and rising global yields could mean a slowdown or even reversal of FPI flows this year,” he said.
Tuesday’s government debt quota auction indicates that foreign investors still haven’t taken a a bearish stance on Indian bonds. An auction for purchases of limits to buy gilts worth Rs 3,840 crore attracted bids worth Rs 5,253 crore from FPIs. At the previous auction, FPIs had bid for limits worth Rs 8,306 crore against a total notified amount of `4,569 crore. The highest bid stood at 6 basis points compared to 8 basis points earlier while the cut-off stood at 2.19 basis points against 5.01 basis points in January.