FPIs' Rs 12,399 crore bet on debt this month highest in over 2 years

Foreign inflows of Rs 47,105 crore into debt in CY23 at 6-year high

Foreign portfolio investments in the domestic debt market hit a 27-month high in November on the back of the announcement of India’s inclusion in JP Morgan’s widely tracked Government Bond Index-Emerging Markets (GBI-EM) from June next year.
 

FPI inflows in debt stood at Rs 12,399 crore as on November 26, against Rs 6,382 crore in October, according to data from the National Securities Depository Limited (NSDL).
 

“The reason is bond inclusion,” explained Vikas Goel, managing director and CEO at PNB Gilts. “Speculative flows have started. Aggressive buys have started now, but serious flows or larger amounts will start in the new year, that is January.”
 

Market participants anticipate a decrease in inflows during December, followed by a resurgence as foreign investors begin taking positions starting in January. “It will only recede now in December as the year ends. And then in late January, the serious flow will start,” said Goel.
 

On September 22, JP Morgan announced the inclusion of India in its widely followed emerging market bond index. India will be included in its flagship index, the GBI-EM Global Diversified index, a process that will start from June next year. The inclusion will be phased over a 10-month period, with 1 per cent weighting included each month, until March 31, 2025. 

Like China, Indian bonds will have a 10 per cent weighting.

In the current financial year, between April and November (until November 26), net FPI inflows into debt securities were Rs 43,703 crore, a stark contrast to net outflows worth Rs 883 crore during the same period a year ago. Foreign investors have pumped Rs 47,105 crore, so far, into the Indian debt market in the current calendar year – most in the past six years. In contrast, 2022 saw net FPI outflows worth Rs 5,706 crore.

For the first time in four years, FPIs emerged as net purchasers of Indian debt in 2023. The last instance of FPIs being net buyers was in 2019 when they invested Rs 25,882 crore in bonds.

Another factor influencing this trend is the eagerness of foreign investors to secure attractive returns amid a perceived shift in the approach of the US Federal Reserve. Signals suggesting that interest rates may have reached their peak have instilled a sense of stability, prompting investors to explore opportunities within the debt market, according to market participants.

“The sense that the market is getting is that the US Federal Reserve may not do more rate hikes from now on. So they may either pause or they may continue to keep the markets at stable levels. So with the stability returning, people are now with the view that this is the time to lock in the rates,” explained Ajay Manglunia, managing director and head (institutional fixed income) at JM Financial.

The anticipation of a cutting cycle in interest rates has led investors to believe that rates will remain higher for an extended period. This perception has resulted in a patient approach, with investors keen on deploying their capital gradually.

 “The rates have peaked around the globe and domestic inflation is also seen stabilising. From January onwards, we will witness active flows,” said V R C Reddy, head of treasury at Karur Vysya Bank.

Despite FPIs being net purchasers, they have scarcely utilised the Reserve Bank of India’s (RBI’s) established thresholds for government and corporate bonds. Eligible FPIs had only made use of 29.72 per cent of the specified ceiling of Rs 2.68 trillion for central government securities as of Friday. Similarly, the utilisation of the upper limit of Rs 6.68 trillion for corporate bonds was even less, standing at 15.43 per cent.