Foreign Banks Set Historic Highs in 2024 Indian Bond Market

Foreign banks have acquired over $16 billion in Indian bonds this year, surpassing the previous year's total purchases within just seven months, according to official data.

This surge in activity coincides with the recent inclusion of India's debt in the JPMorgan Emerging Market index and expectations of better returns due to anticipated interest rate cuts, traders reported.

Additionally, the liquidity surplus in the Indian banking system hit a near one-year high this month, further increasing demand, which traders believe will remain robust.

Ongoing purchases by foreign investors are expected to alleviate the pressure on local banks to absorb bond supply. Foreign banks and portfolio investors, particularly, are likely to focus on short-term bonds, driving yields lower and steepening the yield curve.

So far in 2024, foreign banks have bought bonds worth 1.37 trillion rupees ($16.37 billion) on a net basis, which is nearly 20% of this year's gross supply, according to CCIL data. This marks a new record, surpassing the 1.22 trillion rupees purchased throughout 2023. In July, the 10-year bond yield dropped by 9 basis points (bps), while the five-year yield decreased by 16 bps.

Barclays remains optimistic, noting there is potential for further yield declines. "We maintain our long-duration view ... A strong macro backdrop, favorable demand-supply dynamics, growing foreign interest, and discretionary interest all bode well," said Siddharth Bachhawat, head of markets at Barclays.

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

DBS forecasts the 10-year bond yield to reach 6.75% by October, while Citi predicts it will hit 6.70% by March—an average decrease of about 18 bps from current levels. The short-term yields could decline by as much as 25 bps depending on the rate-cut cycle, according to Alok Sharma, head of treasury at ICBC.