Foreign portfolio investors have scaled back their purchases of Indian bonds in September, primarily due to the weakness of the Indian rupee. The currency, which has been the worst performer in Asia this year, plummeted to an unprecedented low of 88.80 against the US dollar on September 23, driven by concerns over higher US tariffs.

Declining Bond Inflows

The impact of the weakening rupee is evident in the reduced foreign investment in Indian government securities. Net inflows through the fully accessible route for government securities saw a significant drop, falling to ₹6,665.00 crore in September from ₹10,470.00 crore in August. This decline underscores the cautious approach adopted by foreign investors, as the weakening rupee erodes their returns on Indian bonds.

Rupee Performance and Global Factors

The Indian rupee's poor performance can be attributed to various global factors, including:

• Concerns over higher US tariffs
• Global economic uncertainties
• Strengthening of the US dollar

These factors have collectively contributed to making the rupee the worst-performing currency in Asia this year.

India's Position in Asian Markets

In the broader Asian context, India has underperformed in attracting foreign inflows. The current global economic climate has seen more capital flows directed towards China, as investors seek safer havens amidst prevailing uncertainties.

Factors Supporting Bond Purchases

Despite the overall decline, some bond buying activity was observed, supported by:

1. Positioning ahead of the Reserve Bank of India's monetary policy decision
2. Brief periods of dollar weakness before the US Federal Reserve meeting

Potential Inclusion in Global Index

Bloomberg Index Services has sought views on including Indian government bonds in its global index. This development could potentially boost future foreign investment in Indian bonds. However, it's important to note that any decision on this front would take at least a year to implement.

Outlook

The current scenario presents a complex picture for India's bond market. While the weakening rupee has deterred some foreign investors, the potential inclusion in global indices could open up new avenues for investment in the future. As global economic conditions continue to evolve, the performance of the Indian rupee and its impact on foreign bond purchases will remain a key area of focus for investors and policymakers alike.

The Indian rupee has shown a slight recovery, strengthening by 3 paise to 88.69 against the US dollar in early trading. This modest gain comes after the currency hit a record low of 88.76, sparking concerns in the financial markets.

Rupee's Performance

The Indian currency rebounded 4 paise to close at 88.72 per dollar. The recent strengthening is supported by positive Asian currencies and dollar weakness in overseas markets. However, the rupee remains under pressure from continued capital outflows and geopolitical developments, trading in a tight range.

Factors Influencing the Rupee

Several factors are currently influencing the rupee's performance:

• The dollar index declined 0.21% to 97.94
• Brent crude fell 0.58% to $69.72 per barrel
• Foreign Institutional Investors sold equities worth Rs 5,687.58 crore
• India's forex reserves dropped by $396 million to $702.57 billion for the week ended September 19

Market Expectations and RBI Intervention

Market experts suggest that the Reserve Bank of India (RBI) may intervene to keep the rupee within 88.80 levels. The central bank's upcoming policy decision is eagerly anticipated by investors, as it could significantly impact the currency's trajectory.

US Trade Policies

The United States has announced a 100% tariff on branded drugs from October 1, with exemptions for companies building US manufacturing plants. This development could potentially affect trade relations and impact the rupee.

Domestic Equity Markets

Despite the currency volatility, domestic equity markets showed resilience:

Looking Ahead

As the financial markets navigate these uncertain waters, all eyes are on the RBI's upcoming policy decision. The central bank's stance will likely play a crucial role in determining the short-term trajectory of both the rupee and market sentiment in India.