Rupee Bonds See Biggest Surge In Foreign Holdings In Two Years

Foreign holdings of Indian government and corporate notes jumped by the most in two years Wednesday, amid speculation the surge resulted from the inclusion of funds raised through masala bonds. 

Total ownership increased by 80.78 billion rupees ($1.2 billion), the biggest for any day since August 2014, according to data compiled by National Securities Depository Ltd. and Bloomberg. Of this, 74.49 billion rupees flowed into corporate securities, with the rest in sovereign and state-governments' debt. 

"The big jump in inflows seems to be a compilation issue as we think NSDL might have included data for the masala-bond issuances," said Sandeep Bagla, Mumbai-based associate director at Trust Capital Services India Pvt., referring to rupee bonds sold overseas. India will continue to attract funds due to its high yields, backed by "strong" economic fundamentals, he said. 

Wednesday's increase took this month's inflows into rupee bonds to about 156 billion rupees, the most since January 2015. Total foreign holdings, at 3.50 trillion rupees, are now the highest since November 2015. Indian notes have rallied this quarter as the global hunt for yield, improved domestic liquidity and expectations of an interest-rate cut by the central bank spurred demand. 

Housing Development Finance Corp., India's biggest mortgage lender, sold 30 billion rupees of three-year, one-month masala notes in July, becoming the first local issuer to tap the offshore rupee-debt market. About 120 billion rupees has been raised through such issuances, Economic Affairs Secretary Shaktikanta Das said on Tuesday. Sale of local-currency bonds overseas will be within the aggregate limit of foreign investment permitted in corporate debt, according to an April notice from the Reserve Bank of India. 

It's "possible" that the rise in inflows was because of the clubbing of masala-bond issuances, said Harish Agarwal, a Mumbai-based fixed-income trader at FirstRand Ltd. Two calls made to NSDL's office didn't garner an immediate response. 

The yield on sovereign notes due September 2026 rose one basis point to 6.79 percent as of 11:42 a.m. in Mumbai, according to prices from the central bank's trading system. Its close on Wednesday was the lowest for a benchmark 10-year security since June 2009. The rupee fell 0.1 percent to 66.5525 per dollar, paring its advance this month to 0.6 percent. 

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