RBI’s foreign exchange curbs prompted overseas investors to take
profits in the South Asian country’s government bond market,
sparking a selling cycle that sent borrowing costs to a two-year
high, a top fixed-income official at the Nuvama Group said on
Tuesday.
India tightened rules for forex trading between late March
and early April to support a rupee that fell to record lows as
the Iran war pushed up oil prices, worsening the growth and
inflation outlook for the net oil-importing country.
The FX measures, now partially reversed, helped the rupee
but led to a surge in the cost of hedging rupee exposure
overseas.
This “created an opportunity for already invested funds to
unwind their hedges at a profit and exit bond holdings in
India,” said Ajay Marwaha, head of fixed income markets at
Nuvama, a global wealth firm based in Mumbai that manages about
$37 billion.
The rise in hedging costs offered a “windfall” to investors
while deterring them from adding positions, Marwaha said.
Overseas investors pulled out 222 billion rupees ($2.37
billion) from Indian bonds between March 1 and April 15, sending
the benchmark 10-year bond yield up by nearly half a percentage
point to 7.15%. Bond yields move inversely to prices.
“The FX-triggered bond selling then led to rate-triggered
selling by other foreign investors, followed by domestic asset
managers and insurers who needed to cut their exposure to longer
dated bonds,” Marwaha said.
It would take a significant rise in bond yields or a change
in the rates outlook for investors to come back to the market,
Marwaha said.
Nuvama expects India’s benchmark bond yield to move in a
range of 6.95% to 7.05% over the next one month and in a
7.05%-to-7.15% range over three months, with risks of further
rise if El Nino hits monsoon rains.
HIGHER BOND VOLATILITY
Bond purchases by foreign investors for margin funding needs
are adding to debt market volatility, Marwaha said, with
investors holding close to 70% of the equity trading margin in
bonds and churning that portfolio.
Limited supply of short-term bonds after the central bank’s
hefty purchases last fiscal year is also pushing up yields, he
said.
“All short-dated bonds are in short supply. A lot of them
have been given away in OMOs (open market operations). Banks are
now trying to short these papers and sell it to foreign
investors.”
The yield on India’s 7.37% 2028 bond, which is listed on
three global bond indexes, jumped 75 basis points from March to
mid-April despite the central bank assuring it was not thinking
about rate hikes.
Published on April 22, 2026
