Higher yields, easing hopes make Indian debt a bright spot for investors

Vontobel Holding AG

03/09/2025 06:30

By Dharamraj Dhutia

MUMBAI, Sept 3 (Reuters) - Foreign investors are stepping up purchases of Indian government bonds as higher yields boost valuations and the risk of slower growth from U.S. tariffs fuels expectations of more policy easing, four analysts said.

The United States last month imposed tariffs of up to 50% on Indian goods in phases, a move economists warn could shave as much as 80 basis points off GDP growth.

"The impact on India's growth is still under-appreciated. Therefore, our view is that Reserve Bank of India will eventually have to cut the policy rate again this year as growth slows down meaningfully," said Matthew Kok, portfolio manager at Singapore-based Eastspring Investments.

Foreign investors bought a net 105 billion rupees ($1.2 billion) of bonds in August, the biggest monthly inflow since March, and after being net sellers in April-June, clearing house data showed.

Despite those inflows, the benchmark 10-year yield IN063335G=CC ended the month at 6.57%, up nearly 20 basis points from start of August.

"For our funds with local currency bond benchmarks, we are still keen to add India duration because significant downside risks to growth remain, especially after India got hit with a 50% tariff from the U.S.," Kok added.

Traders expect a further rate cut of at least 25 basis points by December, with the RBI's next policy due Oct. 1.

The central bank has lowered rates by 100 basis points in 2025 but struck a hawkish tone in August. Fiscal worries have since pushed yields higher.

"The gap between yields and policy rate widened, which improved valuations of government bonds and expectations of monetary policy easing, could have resulted in buying," said Vivek Rajpal, Asia strategist at JB Drax Honore.

        Foreign investors expect inflows to continue this month, betting that S&P Global Ratings' upgrade to BBB from BBB- will outweigh fiscal concerns and currency weakness.

The rupee fell to a record low of 88.33 per dollar this week, making it Asia's worst-performing currency so far this year.

Still, some investors remain confident about Indian government bonds and look to remain invested.

"We hold a sizeable position in INR rates unhedged and see no reason to change this. The moderately cheap FX, sufficient real rates and the rather de-correlated nature of the Indian market all work in favour," said Carl Vermassen, EM fixed income portfolio manager at Vontobel.

 ($1 = 87.95 Indian rupees)

Foreign flows in Indian government bonds hit 5-month high in August https://reut.rs/3VwCrRu

 (Reporting by Dharamraj Dhutia, additional reporting by Jaspreet Kalra; Editing by Nivedita Bhattacharjee)

 ((Dharamraj.Dhutia@thomsonreuters.com;))