Foreign investors and banks that have stepped up their purchase of Indian government bonds in the last few weeks may buy more in December amid expectations of a policy pivot, analysts said.
“Stability in terminal fed funds pricing has helped ease financial conditions and boosted demand for carry,” said Ashish Agrawal, head of FX and EM macro strategy research, Asia, Barclays.
Foreign investors net bought government bonds worth over 37 billion rupees ($455.81 million) in November, with a bulk of the money invested in liquid bonds, data from the Clearing Corp of India Ltd (CCIL) showed.
Foreign banks also remained active debt buyers in both the primary and the secondary markets, with a net purchase of over 147 billion rupees in the last 17 trading sessions, CCIL data showed.
“We expect foreign investor appetite for Indian fixed-income assets to improve further in December,” added Barclay’s Agrawal.
There has been strong buying interest from foreign players with the reversal from the U.S. Federal Reserve, said Anuj Bhala, head of rates trading at SBM Bank (India). “Positions were light. And locally, the rate hike debate has shifted to a call between 25 and 35 basis points (bps), with 50 bps completely ruled out.”
The Reserve Bank of India’s (RBI) monetary policy decision is due on Wednesday, and a Reuters poll of economists expects the authority to hike the repo rate by 35 bps, after three back-to-back 50 bps moves.
The Fed is also expected to tone down its rate hike to 50 bps on Dec. 14, after Fed Chair Jerome Powell said that the central bank could slow its pace of rate hikes as soon as from December.
“Government bonds, especially short to intermediate tenors, could extend gains into the year-end as easing inflation and slowing growth momentum allows the RBI to slow the pace of hikes and then move to the sidelines,” Barclays’ Agrawal said.
He expects the liquid five-year bond yield to fall further to 6.75% and its spread with the 10-year bond yield to rise.
The five-year 7.38% 2027 bond yield was at 7.05%, down over 35 bps in the last one month. The note was also the most sought-after under the Fully Accessible Route and saw more inflows in November as compared to the 10-year bond.