RBI Hedging Curbs Fuel India Bond, Equity Exodus
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- Reserve Bank of India FX curbs have lifted one-year onshore hedging costs ~30 bps and offshore NDF costs nearly 70 bps, with NDF costs hitting their highest in over 12 years right after the measures were introduced.
- Eastspring Investments portfolio manager Matthew Kok said elevated hedging costs "wipe out almost all the carry and roll-down from Indian government bonds"; the $280 billion AUM firm is currently neutral on Indian bonds.
- Indian government bonds have seen about 211 billion rupees ($2.26 billion) in foreign selling since the Iran war began February 28, with outflows accelerating after the RBI's FX curbs were announced.
- Indian shares have lost roughly $38 billion to foreign selling since the start of 2025, including a record $12.7 billion in March alone, with the Nifty 50 down more than 7% year-to-date.
- Goldman Sachs has cut its India earnings growth forecast by 9 percentage points over the next two years, while Nomura warned of 10-15% downside to consensus earnings and slashed its December 2026 Nifty 50 target by 15% to 24,600.
- First Sentier's Nigel Foo said oil may no longer be the sole trigger for a return of foreign inflows and that "a meaningful rise in bond yields may be needed before sentiment improves," while Aberdeen's Rita Tahilramani expects investors to "remain largely in risk-off mode in the near term."
- State Street's Angela Lan noted India was already facing "headwinds from elevated valuations, AI-led disruption risks and softening earnings momentum" even before the Iran conflict intensified the selloff.
Why it matters: The RBI's defense of the rupee has lifted offshore NDF hedging costs ~70 bps, eroding the carry that drew foreign capital to Indian debt. With Eastspring neutral on bonds and First Sentier and Aberdeen warning sentiment won't shift quickly even if oil eases, currency stability is being bought at the cost of capital market appeal.
