Global funds sold 24.4 billion rupees ($295 million) of index-eligible Indian sovereign bonds in October after JPMorgan Chase & Co. refrained from including the debt in its gauge.
The outflow from the so-called Fully Accessible Route, or FAR, securities marked the first such withdrawal in seven months. JPMorgan decided last month to keep rupee government notes off its emerging-market sovereign bond index, citing investment hurdles including a lengthy investor registration process.
The selling risks fueling further losses in Indian government securities after they rounded off a second month of declines amid a rout in global debt markets. Expectations for more rate hikes from the Reserve Bank of India may weigh on the market, with a Bloomberg survey of analysts predicting that 10-year yields could climb to 7.53% by year-end from around 7.42% now.
The disappointment over non-index inclusion, a falling rupee and better dollar-denominated returns elsewhere drove foreigners to exit Indian debt, said Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd.
JPMorgan’s decision came on the heels of a similar move by FTSE Russell in September. Morgan Stanley had said Russia’s exclusion could pave the way for India to be added to emerging market gauges, potentially drawing inflows of $30 billion.
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