Foreign investors pile into short-dated Indian bonds as rate bets shift

Foreign investors are crowding into short-dated Indian government bonds, a sharp sign that global money is positioning for a possible turn in the Reserve Bank of India’s rate cycle. Bonds with maturities under five years made up more than two-thirds of the 10 notes most bought by overseas investors in March-May, up from less than half in January-February, while the flow pattern swung from 221 billion rupees of net purchases in January-February to a record 177 billion rupees of sales in March before buyers returned in April-May.

The shift came as yields moved higher across the curve. The 10-year benchmark government bond yield rose 34 basis points from March to May, while the five-year yield climbed 55 basis points, compressing the spread to an eight-month low of 15 basis points. Traders said the Iran war had intensified inflation concerns, especially at the front end where duration risk is lower and rate sensitivity is higher.

Krishna Bhimavarapu, APAC economist at State Street Investment Management, said investors were increasingly pricing in tighter policy even though the RBI was widely expected to leave rates unchanged. Standard Chartered went further and called for a quarter-point increase, underscoring how unsettled the policy debate had become ahead of the June 5 decision. Nagaraj Kulkarni, chief rates strategist for South Asia and Indonesia at a foreign bank, said the curve had bear-flattened, creating a valuation opportunity in short-end bonds.

For markets, the message was less about foreigners backing away from India than about where they wanted exposure. A continued tilt toward short maturities could cushion demand at the front end of the bond market even if longer-dated yields stay vulnerable, and that selective buying would matter for India’s borrowing costs, rupee stability and the pace of broader capital inflows into emerging-market debt.