For quite a long while, the rate moves in the Indian market were decided mostly by local actors - the central and state governments, the RBI, banks, insurers and other bond buyers. But with the opening up of the market to foreign portfolio investors (FPIs), these hyperactive investors have emerged as a big influence on rates, too. This has made the Indian bond market and its interest rates quite susceptible to global cues. In 2014 and 2015, Indian G-sec rates remained elevated, even as global central banks held their rates at near-zero in the US, eurozone and Japan. This triggered a flood of FPI flows into Indian bonds, playing the rate arbitrage. In December 2015, however, the US Fed decided to end its free money (officially zero interest rate) policy and laid down a roadmap for hiking policy rates. After delays, it has embarked on these hikes from 2016.
As US G-sec yields shot up, FPIs, who had poured over Rs 2 lakh crore into Indian G-secs and corporate bonds in 2014 and 2016, pulled out Rs 45,000 crore in 2016. In 2017, a strong rupee lured them back with Rs 1.4 lakh crore in net investments. But with FPIs now hitting up against RBI limits on domestic bond bets (both G-secs and corporate bonds), there has been a lull in flows. Meanwhile, a stronger than expected recovery across global economies is prompting other central banks in the eurozone and Japan to withdraw their easy money policies and think of pegging up rates. The yield on the 10-year US treasury has already doubled from its bottom and hovers at 2.7 per cent. Given that FPIs constantly look for arbitrage between emerging markets and developed ones, the global rise in yields and the likelihood of central bank bond selling are big risk factors to domestic bonds too.