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Foreign banks have bought more than $16 billion worth of Indian bonds so far this year, taking only seven months to top the record purchases over the whole of last year, official data showed.

The pick-up in activity came in the run-up to the inclusion of India's debt in the JPMorgan Emerging Market index last month and on hopes of better returns since interest rates are set to decline, several traders said.

Moreover, the country's banking system liquidity surplus reached a near one-year high this month, also boosting demand, which is expected to stay strong, the traders added.

WHY IT'S IMPORTANT

The persistent purchases by foreign participants will reduce the pressure on local banks to absorb supply.

Foreign banks and foreign portfolio investors, in particular, are likely to seek out short-term bonds, driving yields lower and steepening the yield curve.

BY THE NUMBERS

Foreign banks have bought bonds worth 1.37 trillion rupees ($16.37 billion) on a net basis so far in 2024, nearly a fifth of the year's gross supply, CCIL data showed.

These purchases were a record 1.22 trillion rupees over the whole of 2023.

The 10-year bond yield has fallen 9 basis points (bps) in July, while the five-year yield has slid 16 bps.

KEY QUOTES

There is room for yields to move lower and Barclays remains positive, said the firm's head of markets, Siddharth Bachhawat.

"We retain our long duration view ... A strong macro backdrop, favourable demand-supply dynamics, growing foreign interest as well as discretionary interest – all augur well."

Akshay Kumar, head of global markets, India, BNP Paribas, said, "I think foreign bank buying has been more concentrated in the shorter end of the curve, which is why that segment has rallied more."

WHAT'S NEXT

DBS expects the 10-year bond yield to test 6.75% by October, while Citi sees it at 6.70% by March -- an average fall of about 18 bps from current levels.

The short-end could see yields dip by as much as 25 bps depending on the rate-cut cycle, said Alok Sharma, head of treasury at ICBC.

GRAPHIC

($1 = 83.7100 Indian rupees)