Indian Bonds Face Biggest Outflows Since Index Inclusion

Indian bonds, particularly those eligible for global debt inclusion, have witnessed significant outflows in recent weeks. Overseas investors sold Rs 1,680 crore ($200 million) of Fully Accessible Route (FAR) bonds last week, marking the largest outflow since the country's debt was added to JPMorgan's emerging markets bond index in June. This trend can be attributed to a combination of factors, including uncertainty surrounding the Federal Reserve's interest rate cuts, elevated crude prices due to geopolitical tensions, and the Indian central bank's reluctance to follow global monetary authorities in cutting rates.

The outflows came amid an uncertain outlook for the Federal Reserve's interest-rate cuts and high crude prices driven by geopolitical tensions. The size of the weekly selling remains modest compared to the average weekly inflow of $570 million since the index inclusion, indicating a potential shift in investor sentiment. However, the recent outflows highlight the sensitivity of Indian bonds to global interest rate dynamics and geopolitical factors.



The upcoming index inclusions in FTSE Russell and Bloomberg emerging market indexes from January 2025 are expected to have a limited incremental impact on passive inflows. While these inclusions will enhance the attractiveness of duration for Indian bonds, the recent bond outflows are primarily attributed to changes in Fed rate expectations and a pullback in US yields, as well as geopolitical tensions driving elevated crude prices.

The Indian central bank's reluctance to follow global monetary authorities in cutting rates has dampened the appeal of Indian bonds for foreign investors. This shift in expectations has led to a paring back of bets on Indian bonds, contributing to the recent outflows. Kaushik Rudra, global head of fixed income research at Standard Chartered, notes that while Indian bonds have been resilient, they are not immune to this move.

In conclusion, the recent outflows in Indian bonds underscore the importance of global interest rate dynamics and geopolitical factors in influencing investor sentiment. While the average weekly inflow since the index inclusion remains robust, the recent outflows highlight the need for careful monitoring and adaptability in the face of changing macroeconomic conditions. As the Indian bond market continues to evolve, investors must remain vigilant and consider multiple perspectives when evaluating market trends.