India's FX Curbs Deter Foreign Investors in Bonds & Stocks

FX Curbs and Earnings Risks Drive Investor Caution

Foreign investors are growing more wary of Indian markets as new foreign exchange restrictions make hedging the rupee more expensive and complex. These measures, combined with earnings risks driven by geopolitical tensions and high oil prices, are negatively impacting both government bond and equity markets.

Rising Hedging Costs Impact Bond Markets

Actions by the Reserve Bank of India have increased one-year onshore hedging costs by approximately 30 basis points, while offshore non-deliverable forward NDF costs have climbed by nearly 70 basis points. In response, foreign investors have sold about 211 billion rupees, or $2.26 billion, of Indian government debt since February 28, with sales accelerating after the curbs were announced.

Equity Markets Face Mounting Pressure

The equity market is also under significant pressure, with foreign outflows totaling a record $12.7 billion in March alone. Analysts cite elevated valuations and softening earnings momentum, which are exacerbated by high oil prices. Consequently, major brokerages like Goldman Sachs and Nomura have begun cutting earnings forecasts for Indian companies.

Summary Outlook

Market experts do not expect a quick shift in investor sentiment, even if oil prices ease. Lingering concerns over currency stability suggest that a meaningful rise in bond yields may be necessary to improve foreign investor confidence and attract inflows back into the market.

FAQ

Q: Why are foreign investors becoming more cautious about India?
A: The primary reasons are increased currency hedging costs resulting from the Reserve Bank of India's FX curbs and growing concerns over corporate earnings being hit by high oil prices.

Q: How much have hedging costs increased for investors?
A: One-year onshore hedging costs have risen by about 30 basis points, while offshore non-deliverable forward NDF costs have climbed by a steeper 70 basis points.

Source: Investing.com