Investment by foreign portfolio investors (FPIs) in the Indian debt market has seen a notable rise in September so far, with net inflows of Rs 15,357 crore during the first eleven days of the month, slightly lower than the total net investment of Rs 16,421 crore in August, according to data from the National Securities Depository Limited. However, a net total of only Rs 3,328 crore was pumped into government securities designated under the Fully Accessible Route (FAR) during the same period, data from the Clearing Corporation of India (CCIL) showed.
FPI investment in FAR securities has doubled and crossed the Rs 2 trillion mark in nine months since JP Morgan announced the inclusion of Indian debt in its index. Only government bonds issued by the Reserve Bank of India (RBI) under the FAR are included in the index.
Foreign investors have been shifting their bets to other segments to seek higher returns and diversify their portfolios, market participants said.
“Some of the money that is coming in and not coming into the FAR is being invested in corporate bonds. The yields are higher and it is also a function of diversification as Indian markets are looking good in terms of strength. It doesn’t really hurt them to put money into corporate bonds, where they clearly know that money can be made,” said the head of treasury at a private bank. “If they believe that spreads will tighten in the future, not just in the yield curve, they will also make money in terms of spreads tightening,” he added.
Investment in FAR securities had crossed Rs 1 trillion by October 16, 2023. In September 2023, JP Morgan had announced that it would include government papers, issued by the RBI under FAR, in its widely followed GBI-EM from June 28 of the current year.
As of Thursday, total investment in FAR securities stood at Rs 2.34 trillion, up from Rs 94,709 crore as of September 22, 2023.
The inclusion process will be carried out in phases over a 10-month period, with a 1 per cent weighting each month till March 31, 2025. Indian bonds will have a 10 per cent weighting, similar to those of China.
Of the 38 bonds under the FAR, only 27 meet the eligibility criteria for the JP Morgan bond index, which requires a face value of more than $1 billion and a remaining maturity of more than 2.5 years.
Market participants are looking ahead to the start of the US Federal Reserve’s rate cut cycle this month. The US Federal Reserve is expected to cut interest rates by 25 basis points (bps) at its meeting on September 17-18.
“If there is a 50 basis point rate cut, there will be capital outflows initially before inflows start because it implies that the US economy is slower than earlier anticipated,” said Vikas Goel, managing director and chief executive officer, PNB Gilts. “Compared to the equity market, the debt market is quite insulated. There is domestic demand for debt; if FPIs sell after a 50 basis point cut by the Fed, then domestic players will buy because it means there will be pressure on the Reserve Bank of India to cut rates,” he added.
During FY23-24, domestic markets witnessed foreign inflows worth Rs 3.23 trillion, a notable turnaround from outflows worth Rs 45,365 crore recorded in FY23. Of the total inflows, foreign investors pumped Rs 1.2 trillion into the debt segment, marking the highest inflow since FY2014-15. During the last quarter of FY24, foreign investors pumped Rs 54,492 crore into the debt market, leading to a drop in benchmark bond yields by 14 basis points during the period.
First published: September 12, 2024 | 19:32 IS
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