MUMBAI, July 31 (Reuters) - Foreign investors are dumping Indian bonds, rattled by a fresh surge in oil prices from the U.S.-Iran conflict and the absence of any announcement on India’s global bond index inclusion.
They have net sold 65 billion rupees ($682 million) of securities under the Fully Accessible Route over the past five sessions, clearing house data showed.
The torrent of selling marks a sharp reversal from less than two months earlier when foreign investors accumulated Indian bonds in the wake of the Reserve Bank of India's June 5 policy measures to attract dollar inflows.
Between June 1 and July 23, foreign investors poured 426 billion rupees into FAR bonds, which are included in three major emerging-market debt indexes.
The central bank's policy moves were accompanied by the Indian government scrapping taxes on foreign investment in government bonds. Together, the steps spurred expectations that India was moving towards inclusion in Bloomberg's flagship Global Aggregate Index, boosting foreign sentiment.
"Following the rally sparked by the policy measures, there is now higher uncertainty over the near-term outlook," said Norbert Ling, head of fixed-income portfolio management for Asia-Pacific at Invesco, citing Iran-related tensions that could keep oil prices higher and weigh on both the rupee and bond performance.
India imports around 90% of its crude oil requirements, making its current account balance, fiscal and inflation dynamics vulnerable to shocks in the price of the commodity.
Brent crude has surged more than 30% over the past three weeks, briefly topping $100 a barrel, contributing to a partial unwind of heavy foreign inflows. Adding to the headwinds, India's June retail inflation accelerated to 4.38%, exceeding expectations.
Oil and inflation are heightening concerns "over the prospects of RBI policy tightening," said Sherilyn Chew, a multi-asset strategist at DBS. The central bank's next policy decision is due on Wednesday.
Sentiment has been further dented by the lack of progress on India's potential inclusion in Bloomberg's Global Aggregate Index. Bloomberg said in January it would provide an update by mid-2026, but no announcement has been made.
VALUATIONS, LIQUIDITY
Some investors said rich valuations amid the oil worries may have prompted foreign investors to trim exposure.
"We would favor selective exposure rather than a broad-based increase across the curve," said Invesco's Ling.
Investors have also suggested insufficient liquidity is forcing them to take bets in only a select few notes.
"There needs to be a broadening of liquidity across the bond curve," said Philip McNicholas, a strategist at Robeco.
"A deeper market in shorter tenors would be more attractive for stickier active flows."
($1 = 95.3300 Indian rupees)
Reporting by Dharamraj Dhutia and Khushi Malhotra; Editing by Ronojoy Mazumdar
