By Dharamraj Dhutia
MUMBAI, June 4 (Reuters) – Foreign investors are flocking to short-term Indian government bonds as they find attractive entry points amid “expectations that the interest rate cycle is turning, with the Iran war driving inflation higher.”
Bonds with maturities of less than five years accounted for more than two-thirds of the top 10 bonds foreign investors bought during March-May, more than less than half of similar purchases in January-February, clearinghouse data showed.
Overall, foreign investors bought bonds worth Rs 221 billion in January-February, while they sold a record Rs 177 billion in March, before turning buyers in April-May.
Indian government bond yields have risen over the past three months, with shorter duration yields – more sensitive to rates – soaring on concerns about inflation due to the energy shock linked to the Iran war.
The benchmark 10-year bond yield rose 34 basis points from March to May, while the five-year bond yield rose 55 bps, and the spread fell to an eight-month low of 15 bps.
Investors are “increasingly considering a shift toward tighter policy,” said Krishna Bhimavarapu, APAC economist at State Street Investment Management. While the Reserve Bank of India is expected to hold rates at its June meeting, the direction of policy is clearly changing, he said.
“In such an environment, the front end (of the yield curve) offers more attractive risk-adjusted carry with lower duration risk, while the long end remains vulnerable to further revisions if the tightening cycle materializes.”
The RBI rate decision is due on Friday, with most economists expecting the status quo, while Standard Chartered Bank has called for a 25bp hike.
“The curve has flattened and short-term yields have risen more than long-term yields. This has created a valuation-driven opportunity for foreign investors to buy short-term bonds,” said Nagaraj Kulkarni, chief rates strategist for South Asia and Indonesia and head of flows strategy at the foreign bank.
($1 = 95.7800 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Harikrishnan Nair)