Yield-Hungry Foreigners Snap Up India Debt. Local Banks Sell

(Bloomberg) -- The world’s mounting stock of negative-yielding debt is drawing foreigners to Indian bonds. And they’re finding ready sellers in the nation’s state-run banks, looking to trim holdings after a powerful rally.

Global funds have snapped up 59.61 billion rupees ($864 million) of Indian debt since the government’s budget on July 5. State-owned lenders have offloaded an even bigger amount -- 145.4 billion rupees, data compiled by Bloomberg show -- suggesting local funds and other institutional investors were also buyers.

Sovereign Indian yields have tumbled to the lowest in more than two years as the market welcomed Finance Minister Nirmala Sitharaman’s unexpected move to tighten the fiscal-deficit target and shift part of the government’s borrowing burden overseas. At the same time, with the 10-year rate at 6.39%, India offers plenty of premium to developed markets.

“This chase for our yields is going to continue for some time,” said Anand Bagri, domestic market head at RBL Bank Ltd. in Mumbai. “They have very few places to invest that offer a decent yield pickup plus a stable currency.”

For state-run banks hobbled by non-performing loans, the rally is an opportunity to realize gains on their investment portfolios. And along with capital injections also included in the annual budget, that could give them additional firepower to extend credit again as Prime Minister Narendra Modi tries to juice economic growth.

“The signal here is that you want banks to increase lending, and not be in government bonds,” Shailendra Jhingan, chief executive at ICICI Securities Primary Dealership Ltd., said of India’s budget.

--With assistance from Abhishek Vishnoi and Subhadip Sircar.

To contact the reporter on this story: Ragini Saxena in Mumbai at rsaxena30@bloomberg.net

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Ravil Shirodkar, Christopher Anstey

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