Overseas funds have sold $14.6 billion of Indian corporate and government bonds this year, the most among emerging-Asian nations, according to the data compiled by Bloomberg. Indonesia has also seen outflows, but almost half that of India, while South Korea and Malaysia have attracted inflows.
“Foreigners were already looking at India with caution, given the worries over higher fiscal deficit,” said Nagaraj Kulkarni, a rates strategist at Standard Chartered in Singapore, adding, “Covid-led risk aversion accelerated the outflows.”
Global funds own just about 1.5 per cent of the local debt, compared to about 30 per cent in Indonesia. Still foreigners could be an important source of demand for sovereign debt amid a supply glut as Prime Minister Narendra Modi’s government plans to sell a record Rs 12 trillion ($160 billion) of bonds this financial year.
India took steps to further open up the domestic bond market to foreign investors in late March, allowing them unrestricted access on certain bonds, with an eye on inclusion in global indices. However, there have been just around Rs 22,880 crore of inflows in this segment since then.
Headwinds for the bond market are growing with India’s Covid-19 death toll rising to the third-largest globally, with the total number of confirmed cases at more than 2.7 million. That’s expected to put a damper on India’s growth, with the IMF forecasting it to be one of the worst-performing major emerging economies this year.
The prospect of a prolonged central bank pause amid rising inflation is further reducing the appeal of Indian debt. The situation in government bonds is particularly dire, with foreign holdings plunging to Rs 93,400 crore, near a record low reached in June.