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Informist, Monday, Apr. 6, 2026

 

By Aaryan Khanna

 

MUMBAI – The Reserve Bank of India's recent restrictions on foreign exchange trades involving the rupee have created favourable condition for foreign portfolio investors to exit their holdings of Indian government bonds, dealers said. FPIs have taken the opportunity to sell gilts under the fully accessible route at the fastest pace on record.

 

FPIs sold INR 40.33 billion of index-eligible gilts on Thursday, according to Clearing Corp. of India data. On Mar. 30 and Thursday, they sold INR 73.19 billion worth of these bonds, the largest quantum of sales over two sessions since the fully accessible route was introduced in March 2020. Money markets were shut the rest of last week.

 

Most passive investors tracking emerging market bond indices such as J.P. Morgan's flagship Government Bond Index – Emerging Markets had hedged their holdings of gilts by paying non-deliverable forwards in the rupee as the value of those bonds has plummeted. The 10-year benchmark gilt yield rose 37 basis points in March after the outbreak of war in West Asia, with short-term bond yields rising even more due to fears of a rate hike domestically in the coming months. As the cost of hedging increased due to RBI steps, paid positions in the NDF market became profitable and led to a widespread sell-off by FPIs in the underlying bonds, dealers said. 

 

"FPIs had hedged the IGBs (Indian government bonds) by paying in NDF (rupee non-deliverable forwards)," a dealer at a primary dealership said. "The forward points in the NDF market are now up 200 basis points in two days, which has led to massive profit taking and an unwinding of the bond positions onshore." As traders exit gilts, they have found opportunities in safe-haven debt instruments including US Treasury yields, which have also risen sharply and offer dollar-denominated returns.

 

A day after the regulator barred authorised dealers from offering non-deliverable forwards to onshore or offshore clients, the one-year exact period annualised dollar-rupee forward premium rose 78 bps Thursday. On top of that, the spread between the onshore and offshore markets has widened significantly following the RBI's directions, especially in near-term contracts. The spread for the one-month tenor widened almost 100 paise on Thursday. On Mar. 27, the RBI had directed authorised dealers to cap their onshore net open daily forward positions at $100 million by Apr. 10. 

 

FPIs have been selling gilts continuously as the war in West Asia has intensified since it started at the end of February, even before the move in the rupee forwards exacerbated those trades. Their holdings of fully accessible route gilts at the end of Thursday were INR 3.10 trillion, the lowest since Jan. 1. Net sales have totalled over INR 210 billion since their holdings of these gilts peaked at a record INR 3.31 trillion on Mar. 2.

 

The RBI's norms have even proved a boon for those FPIs holding gilts without a foreign exchange hedge to manage rupee volatility, which traders do to potentially maximise gains. The regulator's clampdown on speculative bets led to an over 2% surge in the spot rupee to as high as 92.82 a dollar Thursday, only a session after it hit a record low of 95.22 against the greenback. This provided an attractive exit for foreigners as their notional losses from the rupee weakness over the past month were minimised, dealers said.

 

The Indian currency fell 4.2% against the dollar in March. Although the rupee remained firm against the greenback in early trade Monday, traders expect the selling pressure from FPIs in gilts to continue as long as crude oil prices remain high, putting pressure on India's current account deficit and inflation.

 

"In addition to those unwinding FX hedges, even those who were unhedged found it to give opportunity to exit since the rupee went from 95 to 93 (per dollar)," a dealer at a foreign bank said. "While there be a knee-jerk associated with profit booking immediately, the rationale for FPIs to hold bonds is actually reducing as the rupee is now considered fundamentally overvalued and the room to fall is much greater."  End

 

US$1 = INR 93.07

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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