With $13.7 billion worth of outflows from its bond market in 2020, India stood out, even though most of its Asian peers saw record inflows. The stock market in the world continues to see record inflows of dollars, but bonds are still being exiting by overseas investors. In the initial months, the Covid-19 pandemic wreaked havoc on stocks, but after central banks injected liquidity globally, investors started to search for the best alternatives for parking this cash. Bonds would do better in a recessionary year and low-risk government paper would be consumed like hotcakes. Dollars have raced into bonds sold by Asian countries in search of returns. This reasoning, however, turned on its head when it comes to Indian markets. While the fixed income market in Asia had a record $152 billion in 2020, India witnessed $13.7 billion going out as reported by the Barclays Bank. Thailand and Indonesia have also seen outflows, but quantum outflows are relatively lower. So where did the USD flow into? With record inflows into its shares, China towered over others. At the end of 2020, $475 billion worth of Chinese paper had been owned by overseas investors, a huge chunk of sovereign paper. China has managed to garner a huge chunk of dollars by its sheer scale and active offshore bond market. Although others, including Korea and Malaysia, got their share as well. Global investors' Korean bond holdings grew to $138 billion, while Malaysian paper holdings added up to $55 billion. Holdings fell dramatically to $41 billion in India. Global investors held only 2% of India's outstanding government paper, compared to over 40% in Malaysia and nearly 9.7% in China. So what’s the reason behind foreign investors avoiding purchasing Indian bonds? A host of reasons are responsible, but the concern about supply is the most important. State and central government market borrowings have more than doubled in FY21, with the Centre set to borrow about Rs.12 trillion. The domestic bond market in India faces the full brunt of deficit finance, which has contributed to the perception that bond yields have bottomed out. Then how can the foreign investors warm up to the Indian market? While some analysts agree that greater access and participation in global bond indices is important, it all depends on how much benefit investors can receive. With operational turns and open market activities dictating prices, India's bond market has been under the strong control of the central bank. This means that punting is heavily restricted on the yield curve. In the past, RBI has suggested that the benchmark 10-year bond yield is loath to see a spike above 6%, whereas the incessant supply has ensured that yields do not trend any lower. When will there be a return of foreign investors in the Indian bond market? Well, This will depend on how long interest rates will remain benign and the excess of liquidity will remain. These variables help prevent rates on government bonds from increasing. But the recent decision by the RBI to signal the first step towards eliminating pandemic-related steps does not bode well for liquidity. Moreover, with the Union budget due next month, international investors will be waiting to see both the FY21 and FY22 headline deficit estimates as well as the fine print on their funding. Global liquidity can continue to favor equities over Indian bonds, for now.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.
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