Ahead of the Reserve Bank of India's expected interest rate cut this week, foreign investors are showing a greater interest in purchasing Indian government bonds.

According to clearing house data, foreign investors have net purchased debt totaling Rs 18,200 crore ($2.09 billion) over the last seven days, exceeding their combined purchases over the preceding 19 weeks.

According to Ashhish Vaidya, managing director and treasurer of global financial markets at DBS Bank India, "I would expect the central bank to start with a token rate cut of 25 basis points this week."

Because they might not want to miss the rally and underperform the global bond indexes, portfolio managers who are underweight on Indian bonds have begun rebalancing their holdings, according to Vaidya.

Since JPMorgan announced the inclusion of Indian debt in September 2023, the total amount of foreign purchases of Indian bonds with no investment limit has exceeded $20 billion.

Markets generally anticipate a 25 basis point rate cut in the RBI's monetary policy decision, which is due on Friday.

The central bank's announcement of a massive liquidity infusion package and its secondary market bond purchase further raised expectations.

Overnight index swap rates have dropped more than 30 basis points in the same time frame, while the yield on the 10-year benchmark bond has lowered 20 basis points from its peak three weeks ago.

Investors warn that if the central bank does not implement a rate cut, these flows could reverse, particularly from shorter-term bonds.

"If the RBI does nothing, bond markets may become disappointed and sell off, which would raise bond yields. As investors reevaluate their holdings, the absence of a rate cut may cause bond volatility to rise, according to Manish Bhargava, CEO of Straits Investment Management.

"Without a cut, 2-year and 5-year bond yields could rise as markets push out rate cut expectations."