Global banks are increasingly targeting shorter maturities in their purchases of India’s sovereign bonds, capitalizing on improved liquidity amid limited supply, according to Vikas Jain, Bank of America’s head of India fixed income.
Foreign banks have purchased nearly 600 billion rupees ($7.2 billion) in bonds of all maturities since early June, while state-run banks and mutual funds have been selling, based on data from Clearing Corp. of India (CCIL). However, CCIL does not provide a breakdown by maturity.
The demand for short-term bonds is driven by a combination of lower treasury bill supply and improved banking liquidity, which has been largely spurred by higher government spending and the maturation of large bond issues, Jain explained. “Investors’ eagerness for short-term bonds is driven by lower supply of treasury bills, coupled with banking liquidity improvement that was largely triggered by higher government spending and large sizes of bonds that matured,” Jain said in an interview.
This preference for shorter-dated notes highlights a common strategy among investors to manage balance sheets using such instruments. It also reflects the rapid changes in India’s fixed income market following the inclusion of Indian sovereign bonds in JPMorgan Chase & Co.’s emerging-market index last month.
The JPMorgan index inclusion has boosted demand for bonds. “Foreign banks have also seen increased demand for government securities from foreign portfolio investors, and hence they have increased their inventory to meet this demand,” Jain added.
In a surprising move, Indian authorities cut the sales of treasury bills with maturities up to a year by 600 billion rupees in the last quarter, leading to a seven basis points drop in the yield on the three-year bond last month, compared to a three basis points rise on the 10-year bond.
Improved liquidity has lowered overnight rates, reducing banks’ borrowing costs for bond purchases and driving up demand for shorter maturities, according to Jain. Foreign banks operating in India, which benefit from better liquidity, often manage their asset-liability with short-term papers, he noted.
Despite the index-inclusion inflows, the yield on the benchmark 10-year bond has yet to dip below 6.95%. A lower fiscal deficit in the budget could be the next significant trigger for the market, Jain suggested. “The only way it can break that is if the fiscal deficit number comes below 5%,” he said. “Then we are definitely moving toward 6.75%-6.80% kind of a yield level.” The yield on the 10-year bond was up one basis point to 7% on Monday.
Jain also forecasted that the Reserve Bank of India might cut interest rates by 100 basis points over the next 18 months. “There is a much bigger room for the yield curve to move lower if the repurchase rate goes to 5.5% by March 2026,” he concluded.
