FPI inflows into domestic debt market down to trickle in September

Net inflows in 2023 are the highest in past six years

Foreign portfolio investors’ (FPIs’) net investment in the domestic debt market this month, so far, has sharply declined amid the rise in US Treasury yields and the narrowing of the spread with Indian government papers.

FPI inflows in debt stood at Rs 125 crore as of September 24; the figure was Rs 7,645 crore for August.

Between April and September, so far, net FPI flows into debt securities were Rs 25,138.2 crore, against an outflow of Rs 9,388.3 crore in the year-ago period.

In the calendar year 2023, so far, foreign investors have pumped Rs 28, 341 crore into the Indian debt market on a net basis – most in the past six years. Monthly flows have remained positive since being negative in March.

“Global yields have been rising. So, trade here becomes less lucrative. The spread between the Indian and global yields is narrowing. Currency depreciation is also expected. The Indian currency is not appreciating, so they (FPIS) are not getting the required return,” said Arun Bansal, executive director head of treasury, IDBI Bank, explaining why FPI inflows are weak in September.

“Bond inclusion is not going to happen soon. It is in June next year. We can say the yield upside is capped somewhere around the 7.25-7.30 per cent level. It will not go beyond that as the net supply of government bonds in the next half is less,” he said.

According to the existing schedule, the central government aims to borrow Rs 15.43 trillion through bond sales in the current financial year, with approximately 42 per cent of this amount planned to be borrowed during the October-March period.

JP Morgan announced the inclusion of India in its widely followed emerging market bond index on Friday. It included India in its flagship index GBI-EM Global Diversified index.

When the yield spread narrows, the potential return on Indian investments becomes less attractive than the lower-risk US investments. As a result, FPIs may reallocate their capital to pursue better risk-adjusted returns.

The yield spread between the 10-year US Treasury bond and the domestic benchmark bond has narrowed by 40 basis points in September. The yield on the benchmark 10-year government settled at 7.15 per cent on Monday. Meanwhile, the 10-year US Treasury note was trading at 4.50 per cent at the time of close of Indian market hours.

 “The US is now at 4.50 per cent. So, if you put in the hedge cost, it makes sense for people to divert their flow to advanced economies, typically the US,” said Aditya Vyas, chief economist at STCI Primary Dealer.

Except for March, FPIs have been net buyers of Indian debt every month this year. Their net inflows peaked in June at Rs  10,325 crore.

FPIs have emerged as net purchasers of Indian debt in 2023 for the first time in four years. In 2019, they invested Rs 25,882 crore in Indian bonds.