Global funds used to clamour for more access to India’s debt markets. The high-yielding bonds are now the least popular in Asia as the nation struggles to contain the coronavirus pandemic.

Overseas funds have sold $14.6 billion of Indian corporate and government bonds this year, the most among emerging-Asian nations, according to data compiled by Bloomberg. Indonesia has also seen outflows, but almost half that of India, while South Korea and Malaysia have attracted inflows.

Foreigners were already looking at India with caution given the worries over higher fiscal deficit, said Nagaraj Kulkarni, a rates strategist at Standard Chartered Plc in Singapore. Covid-led risk aversion accelerated the outflows.

Global funds own just about 1.5 per cent of the local debt, compared to about 30 per cent in Indonesia. Still foreigners could be an important source of demand for sovereign debt amid a supply glut as the Modi government plans to sell a record ₹12 trillion ($160 billion) of bonds this fiscal year.

Growth worries

Meanwhile, India’s Covid-19 death toll has grown to the fourth-largest globally, with the total number of confirmed cases at more than 2.6 million. That is expected to put a damper on India’s growth, with the IMF forecasting it to be one of the worst-performing major emerging economies this year.

The prospect of a prolonged central bank pause amid rising inflation is further reducing the appeal of Indian debt. The situation in government bonds is particularly dire, with foreign holdings plunging to ₹934 billion, near a record low reached in June.

In the near term, the rupee government debt market is likely to be driven by higher-than-expected inflation and expectations over whether there would be further RBI support for bonds, said Joevin Teo, Head of Asian Fixed Income, Amundi Singapore Ltd.

For the first time in almost a year underwriters stepped in to help push a 10-year sovereign bond sale over the line on Friday, in a sign of flagging domestic demand for the debt. Concerns of an increase in sovereign borrowing have also taken hold after the RBI’s lower-than-expected dividend payout to the government.

Unless there is a big improvement toward emerging market local currency assets, it is difficult to see significant moves into the Indian market in the near term, said Manu George, Managing Director and senior fixed-income strategist at TCW Singapore Asset Management Pte.

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