Foreign inflows into government bonds through the fully accessible route (FAR) touched a five-month high in August. Experts attributed widened spread between US treasury and Indian yields for the higher inflows.
In August, government bonds received inflows worth Rs Rs 9,690 crore compared to Rs 2,466 crore in July and an outflow of Rs 718 crore in June. April and May saw highest outflows at Rs 11,145 crore and Rs 12,317 crore, respectively. The outflows were majorly led by profit-booking and narrowed yield spreads.
Yield spread boosts bond appeal
“In the last one month, bond yields have risen by more than 20 bps. So bonds which are in the fully accessible category have become more attractive. These securities have the double benefit of high yields and free from capital controls. And they yield among the highest in the globe,” said Madhavankutty G, chief economist, Canara Bank.
Currently, the 10-year benchmark bond is trading at 6.56%, while the US Treasury of the same tenure is at 4.23%, offering a spread of 233 bps. In August, the yields rose as much as 23 bps to 6.60%. The spread between Indian bonds and US treasury bonds of 10 year fell to its lowest in over 20 years to 164 bps in May due to rising US yield on fiscal concerns.
Long-term confidence, but risks remain
“FAR bonds are attracting more inflows into India particularly in August. With improving macro outlook, the real yield differential is highly attractive to global investors. India’s fiscal consolidation (narrowing deficit) and falling inflation continue to support long-term confidence. The S&P upgrade further boosts credibility, lowering perceived risk for investors in Indian sovereign debt. Global funds are also seen diversifying away from China and other emerging markets due to political risks, weak growth, and currency pressures,” said Kunal Sodhani, head of treasury at Shinhan Bank.
Indian bonds are set to be included in the FTSE Russell index from September. Since it is a small index, it will not have a major impact. As currency volatility and global uncertainties are still in play, experts doubt the sustained inflows going ahead.
