[NEW DELHI] Foreign banks sold a record amount of Indian government bonds on Thursday (May 8), as a growing border conflict with Pakistan weighs on investor sentiment.
They sold a net US$1.2 billion of the debt, a high according to data from the Clearing Corp of India going back to 2006.
The move signals growing concerns over how escalating hostilities with Pakistan may impact markets, even as expected interest rate cuts from the Reserve Bank of India provide some cushion for investors.
It’s also putting a dent into the nation’s appeal as a relative safe destination amid global trade uncertainties.
“While macro fundamentals in India are supportive of Indian government bonds, the near-term sentiment, and flows will depend upon the India-Pakistan developments,” Nagaraj Kulkarni, co-head of Asia rates (ex-China) at Standard Chartered, said. The bank is still holding on to its recommendation to buy five-year government bonds, he said.
Indian stocks and bonds fell for a second day. The yield on the benchmark 10-year note, which had slid nearly 30 basis points since an RBI rate cut in February, advanced about nine basis points in two days. The rupee was little changed after its worst decline since 2022 in intraday trading on Thursday.
The developments over the past few days reversed recent gains in Indian bonds that were driven by the central bank’s cash injections and interest-rate cuts. Still, going back to previous incidents, the border skirmishes rarely had any long-term impact on Indian markets.
The conflict will likely increase risk premiums, though the situation is unlikely to escalate out of control, Kaushik Das, chief India economist at Deutsche Bank in Mumbai, wrote in a note. He expects the central bank “to intervene to contain volatility.”
The RBI doesn’t expect wild swings in the rupee but is ready to use foreign reserves to preserve currency stability as tensions with Pakistan escalate, according to people familiar with the matter. BLOOMBERG
