Mutual Funds and FPIs were among the biggest traders of govt debt in 2020

While they hold no more than 5% of GOI debt stock jointly, their buying and selling stood out in 2020, when Centre and state govts expanded their market borrowing plans

For an ordinary tax payer, mutual funds usually refer to the systematic investment plans or SIPs in equity-oriented funds. But a market player invests in a range of debt and liquid funds, hybrid funds and so on. During the last decade or so, mutual funds became ubiquitous, and a popular way of investing money in the market for uninitiated and new investors.

But in the last few years, and especially in 2020, they played another important role. Mutual funds got good inflows in debt funds, suffered a net outflow in equity, and ended up being one of the top buyers of government securities.

Mutual funds have never been this aggressive in buying G-Secs, according to an analysis of Public Debt Statistics data maintained by the Department of Economic Affairs and the Reserve Bank of India. Their share in G-Sec holding has generally been close to a paltry 1 per cent in the overall pie, occasionally rising in 2008-2009 (global financial crisis) and in 2015.

But from March 2019 to September 2020, their share in the G-Sec ownership pie rose from 0.35 per cent to 2.42 per cent. In absolute terms, MFs now hold Rs 1.72 trillion worth of G-Secs. They held as little as Rs 20,000 crore worth of central government securities at the end of FY19, which had risen to Rs 92,000 crore at the end of FY20. 

In the most recent quarters, MFs even put foreign portfolio investors behind. FPIs held G-Secs worth Rs 2 trillion on average in the last few quarters. In the quarter ending June (Q1 FY21), their holding came down to Rs 1.2 trillion, to rise again to Rs 1.46 trillion at the end of Q2.

Together, the two hold not more than five per cent of Government of India’s debt stock. The majority holders are scheduled commercial banks, insurance companies and the RBI, followed by provident funds, who together account for more than 80 per cent of GoI’s debt.

But it was the buying and selling by FPIs and MFs that stood out in 2020, when the Centre as well as state governments expanded their market borrowing plans as the lockdown hit their revenues hard.

If we look at the trading in government debt market in 2020, mutual funds, the minor stock holders, were among the top traders.

They constituted 16 per cent of buy orders in Q1, and about 18 per cent of them in Q2. More importantly, buy orders from MFs were more than sell orders in these two quarters. These include G-Secs, treasury bills (T-bills) and state development loans (SDLs).

As against the majority holders, MFs were thus the major players in government debt market in 2020, with respect to their historical average and their debt stock holding.

Experts said that part reason for this were the new rules by the market regulator Securities and Exchange Board of India (Sebi) after the liquidity crisis that rattled financial markets in 2018.

Secondly, even the inflows to mutual funds were strong in the debt segment, as investors shunned equity funds. As the Indian economy unlocked, and the track of recovery became clearer, equity MFs saw flight in comparison to the stock market which boomed. Debt mutual funds (barring liquid funds), on the other hand, saw increasingly higher net inflows.

As for FPIs, who pulled out of G-Secs in the first half of 2020, the reasons were very simple. There was risk aversion globally, and FPIs flew from emerging markets in equity as well as debt. But with RBI’s liquidity measures and prompt action, confidence was restored and FPI’s made a comeback to buying government securities in the second half of 2020.

But FPIs have been genuinely concerned about a possibility of negative interest rates, high inflation, and fiscal stress in India, some experts said. The recent inflation numbers offer some respite, and fiscal certainty will appear on the horizon within a month.

In the last three years, mutual funds have entered strongly in the treasury bills market (short term government debt) as well. In March 2018, Mfs held only 2.2 per cent of outstanding T-Bills. This shot up to 23.5 per cent at the end of June 2020 (Q1), moderating to 19.9 per cent in Q2.

In the same two quarters, the RBI forayed into the T-bills market, holding as much as Rs 1 trillion worth of T-bills in Q1, and close to Rs 50,000 crore in Q2. State governments let go of T-bills in the same period.