Indian sovereign bonds are set to see their first monthly outflow since joining JPMorgan Chase’s flagship index, as the narrowing yield gap with U.S. Treasuries reduces their appeal.
Foreign investors sold ₹77.3 billion ($910 million) worth of Fully Accessible Route (FAR) bonds up to November 28, according to data from the Clearing Corporation of India Ltd. The outflows follow a surge in U.S. Treasury yields and a stronger dollar, fueled by expectations of higher U.S. inflation and stable Federal Reserve rates after Donald Trump’s election victory.
The yield differential between India and the U.S. dropped to 2.39 percentage points this month, the lowest in over a year. According to Experts, the attractiveness of emerging markets has waned as U.S. rates remain high.
The bond outflows come after JPMorgan’s September announcement of India’s inclusion in its emerging market index sparked increased foreign buying earlier this year, doubling foreign holdings of index-eligible bonds to ₹2.4 trillion. However, rising hedging costs, up 75 basis points since September, and uncertainty over U.S. economic policies have dampened investor sentiment.
Morgan Stanley analysts noted that significant inflows are unlikely to resume before year-end, given the elevated U.S. Treasury yields, strong dollar, and uncertainties around the incoming U.S. administration’s policies.
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