According to sources the risk of overseas investors in rupee bonds getting caught wrong-footed and weakening india’s currency further is surging as losses this month outpace Asian peers amid mounting geopolitical tensions in the region. Meanwhile according to Samir Lodha, chief executive officer at QuantArt Market Solutions a mumbai based currency risk advisory a sharp drop in the rupee may wipe out most of the profits for offshore investors as they don’t usually hedge currency risk for short term debt investments into the country.
Furthermore any sell-off in foreign holdings of Indian corporate and government bonds may set off a spin which weakens the currency further. Reportedly the surge in inbound investments into rupee bonds was largely driven by carry trades, adding to fears of a quick reversal in flows if the drop in rupee is not checked. Currently the currency slumped more than 3% against the greenback this month, setting it up for its second worst monthly loss in four years, as india escalated tensions with pakistan by revoking seven decades of autonomy for the state of Kashmir.
Lodha said by phone “Though the mounting bets were safe as long as the currency was stable, now many are staring at their returns getting wiped off”. “Any large scale unwinding of bond holdings by foreign investors risks triggering a downward spiral for the rupee to a fresh low.”