Global Holdings of Indian Bonds Jump to a Record as Limits Eased

Global holdings of Indian bonds surged to a record after the nation eased investment rules for foreigners buying government notes last week.

Overseas ownership of rupee-denominated sovereign and corporate notes climbed to $38.8 billion as the funds bought a net $491.40 million on July 25, exchange data showed today. That surpassed an earlier peak of $38.5 billion reached before the U.S. first flagged stimulus cuts in May 2013. India last week raised an investment cap on government debt by $5 billion to $25 billion, while keeping the total limit at $81 billion, in response to unprecedented fixed-income inflows in 2014.

“India remains an attractive destination for foreign money,” Sagar Shah, deputy vice-president for treasury at RBL Bank in Mumbai, said in a phone interview. “Inflows should accelerate after the change in limits. At present, there are no immediate negatives that the bond markets are faced with.”

While India allowed foreign asset managers to buy more bonds, it cut quotas for sovereign wealth funds to $5 billion from $10 billion, keeping the overall holdings cap unchanged. The Reserve Bank of India also set a minimum maturity period of three years for new purchases of government notes. Allocations for sovereign wealth funds were reduced after such investors used less than a quarter of the limit available to them, while other funds exhausted almost all of their quota.

Inflation, Deficit

Overseas funds, which pulled a record $8 billion from local debt last year, have plowed back an unprecedented $13.9 billion in 2014, as Indian policy makers succeeded in reining in inflation and the budget deficit, while the nation’s most decisive election in 30 years buoyed the rupee. The currency has appreciated 2.8 percent in 2014 to 60.1375 per dollar, according to prices from local banks compiled by Bloomberg.

“It opens up the market more for the more active participants and gives more flexibility for real money managers like ourselves and even though it’s got that three-year restriction in terms of maturity, I don’t think that’s a bad thing at all,” Ashley Perrott, the head of pan-Asia fixed income in Singapore at UBS Global Asset Management, said in a telephone interview on July 24, a day after the limits were raised. “We generally want to be buying the longer-term bonds anyway. India looks pretty good from a duration perspective.”

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