Foreign banks are intensifying their investments in shorter-term Indian sovereign bonds, taking advantage of enhanced liquidity amidst constrained supply, as stated by Bank of America Corp.’s head of India fixed income.
Since June, foreign banks have acquired nearly 600 billion rupees ($7.2 billion) across all maturity periods, contrasting with divestments by state-run banks and mutual funds, according to Clearing Corp. of India data, which does not categorize purchases by maturity.
Vikas Jain, overseeing India fixed income, currencies, and commodities trading at Bank of America, attributed investors’ focus on short-term bonds to reduced treasury bill availability and improved banking liquidity spurred by sizable bond maturation and increased government spending.
This inclination towards shorter-dated securities underscores banks’ strategy in managing balance sheets and reflects the dynamic shifts in India’s fixed income landscape following JPMorgan Chase & Co.’s recent inclusion of Indian sovereign bonds in its emerging-market index.
Jain noted that the JPMorgan inclusion has heightened bond demand, particularly from foreign portfolio investors, prompting foreign banks to augment their holdings to meet this surge.
Indian authorities surprised markets by scaling back treasury bill sales by 600 billion rupees in the last quarter, pushing yields on three-year bonds down by seven basis points in contrast to a three-point rise for 10-year bonds.
Jain highlighted that improved liquidity has reduced overnight rates, cutting borrowing costs for banks purchasing bonds and amplifying demand for short-duration securities. Foreign banks operating in India, benefiting from enhanced liquidity, frequently employ short-term instruments for asset-liability management.
Looking ahead, Jain suggested that if the government achieves a lower fiscal deficit in the budget, it could serve as a significant market catalyst, potentially pushing the yield on the benchmark 10-year bond below the current 6.95% level.
“The only way it can break that is if the fiscal deficit number comes below 5%,” Jain asserted. “Then we are definitely moving toward 6.75%-6.80% kind of a yield level.”
Anticipating a 100-basis-point reduction in interest rates by the Reserve Bank of India over the next 18 months, Jain emphasized the potential for further declines in the yield curve if the repurchase rate reaches 5.5% by March 2026.
