Foreign Banks Boost Indian Bond Market with Record Purchases in 2024

In 2024, foreign banks have surged, investing over $16 billion in Indian bonds in seven months, surpassing last year's total purchases. This rise followed India's inclusion in the JPMorgan Emerging Market index and the anticipation of better returns with declining interest rates. India's banking system boasts a surplus, boosting demand, expected to sustain. This foreign influx eases pressure on local banks, pushing yields down. Forecasts see 10-year yields at 6.75% by October.

In a significant surge of confidence in India's bond market, foreign banks have made remarkable strides, acquiring over $16 billion worth of Indian bonds in just seven months this year. This record-breaking pace has already eclipsed the total purchases made in the preceding year, according to official data.

The heightened activity leading up to India's debt being included in the JPMorgan Emerging Market index last month has spurred this influx. Traders cite the anticipation of improved returns amidst an impending decline in interest rates as a driving factor behind this substantial foreign investment.

Moreover, India's banking system finds itself in a liquidity surplus situation, reaching a near one-year peak this month. This surplus has further fueled demand, with traders expressing optimism that this trend will persist and remain robust in the foreseeable future.

The continual influx of foreign capital into the market is poised to alleviate the strain on local banks to absorb the bond supply. Particularly, foreign banks and portfolio investors are gravitating towards short-term bonds, a shift that is contributing to driving yields lower and shaping the yield curve.

According to data from CCIL, foreign banks have netted bond purchases amounting to 1.37 trillion rupees ($16.37 billion) in 2024 so far, representing nearly a fifth of the total gross supply for the year. This figure surpasses the record-breaking 1.22 trillion rupees in purchases made throughout 2023.

The recent trends are reflected in the bond yields, with the 10-year bond yield witnessing a decline of 9 basis points in July, and the five-year yield sliding by 16 basis points.

Siddharth Bachhawat, head of markets at Barclays, maintains an optimistic outlook, stating, "There is room for yields to move lower. A strong macro backdrop, favorable demand-supply dynamics, growing foreign interest, as well as discretionary interest – all augur well."

Echoing this sentiment, Akshay Kumar, head of global markets, India, at BNP Paribas, noted, "Foreign bank buying has been more concentrated in the shorter end of the curve, which is why that segment has rallied more."

Looking ahead, DBS projects the 10-year bond yield to reach 6.75% by October, while Citi anticipates a figure of 6.70% by March, reflecting an average decline of approximately 18 basis points from current levels. Additionally, the short-end of the curve could witness yields dipping by as much as 25 basis points contingent on the rate-cut cycle, according to Alok Sharma, head of treasury at ICBC.