FPI investment in debt rebounds in September, FAR allocations lag

Foreign portfolio investors' (FPI) investment in the Indian debt market has seen a notable increase in September so far, with net inflows of Rs 15,357 crore during the first eleven days of the month—a little short of the total net investment of Rs 16,421 crore in August, according to data on the National Securities Depository Limited. However, only a net total of Rs 3,328 crore was infused in government securities designated under the Fully Accessible Route (FAR) during the same period, Clearing Corporation of India (CCIL) data showed.

FPI investment in FAR securities had doubled, surpassing the Rs 2 trillion mark within nine months of the announcement of JP Morgan including Indian debt in its index. Only government bonds issued by the Reserve Bank of India (RBI) under FAR are included in the index.

 

Foreign investors have been shifting their bets to other segments to seek higher returns and diversify their portfolios, said market participants.

“Part of the money which is coming in and which is not going into FAR is going into corporate bonds. Higher returns and it is also a function of diversification as Indian markets are looking good in terms of strength. It doesn't really harm them from putting money into corporate bonds where they know clearly that there is money to be made,” said the treasury head at a private bank. “If they believe spreads will contract going forward, so not only on the yield curve, they will make money in terms of spread contraction as well,” he added.

The investment in FAR securities had exceeded Rs 1 trillion on October 16, 2023. In September 2023, JP Morgan had announced that it will include government papers, issued by the RBI under FAR, in its widely tracked GBI-EM starting June 28 of the current year.

As of Thursday, total investment in FAR securities stood at Rs 2.34 trillion, against Rs 94,709 crore on September 22, 2023.

The inclusion process will be phased over a 10-month period, with 1 per cent weight included each month until March 31, 2025. Indian bonds will have a 10 per cent weight, similar to China.

Out of 38 bonds under FAR, only 27 meet the eligibility criteria for the JP Morgan bond index, which requires a face value of over $1 billion and a remaining maturity of more than 2.5 years.

Market participants now eye the onset of the rate cut cycle by the US Federal Reserve in the current month. The US Fed is widely expected to cut interest rates by 25 basis points (bps) in the 17-18 September meeting.

“If a 50 basis point rate cut happens, then initially there will be outflow before inflow begins, because it implies that the US economy is slower than earlier anticipated,” said Vikas Goel, managing director (MD) and chief executive officer (CEO), PNB Gilts. “When compared to equity, the debt market is fairly insulated. There is domestic demand for debt; if FPIs sell after a 50 bps cut by the Fed, then domestic players will buy because it means there will be pressure on the RBI to cut rates,” he added.

During the financial year 2023-24, domestic markets witnessed foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365 crore worth of outflow recorded in FY23. Of the total inflows, foreign investors injected Rs 1.2 trillion into the debt segment, marking the highest influx since the financial year 2014-15. During the last quarter of FY24, foreign investors infused Rs 54,492 crore in the debt market, which led to a fall in the yield on the benchmark bond by 14 basis points during the period.