Foreign investors net sellers of Indian bonds in Oct; 2nd outflow in 2024

Foreign investors were net sellers of domestic debt in October for the first time since the official inclusion of Indian government bonds in the JP Morgan bond indices, with net outflow worth Rs 4,697 crore.

 

This marked the second instance in the current calendar year where foreign portfolio investors (FPIs) were net sellers in a month. The first month was in April when they offloaded Rs 11,218 crore worth of bonds.

 

Geopolitical tensions, and with no immediate indication of domestic rate cuts, investors have been reallocating their portfolios to tap into higher-yielding assets, said market participants. 

 

Additionally, China’s potential stimulus announcement, expected on Thursday, could prompt further outflows from both bond and equity markets in India. This is because investors seek riskier, high-reward assets, said market participants.

 

 

The upcoming US election is another pivotal factor affecting FPI sentiment.

 

If Donald Trump assumes office, concerns about fiscal deficit management could weigh on the bond market.

 

Currently, US bond yields have shown some volatility, with the yield moving from 4.3 per cent to 4.4 per cent. This is despite favourable data, such as the recent jobless claims. 

 

However, bond market participants said while there has been a short-term FPI outflow from India’s debt market, this trend may not persist. The withdrawals appear more related to portfolio reallocation, with investors seeking value rather than a permanent shift away from India.

 

“If Trump comes, then there is certain concern regarding the fiscal deficit. So, it is considered not so good for the bond market,” said Shrisha Acharya, vice-president, treasury, Anand Rathi Global Finance.

 

“Then, the China stimulus package needs to be seen. If that happens, then even the equity market will start getting corrected. There is a large sell-off in the equity market as well,” he added.

 

Market participants said that November presents several global events that could shape FPI flows in India’s debt market.

 

The Federal Reserve's anticipated 25-basis point (bps) rate cut may bolster US bond prices, weighing on domestic securities.

 

Additionally, China’s potential stimulus announcement could channel investments into Chinese equities, sparking outflows from other markets, including India, as investors pursue value in riskier, high-reward assets.

 

“We have events lined up like the Fed meeting, and US elections,” said a dealer at a state-owned bank. “Our market is relatively stable when we look at the US treasury yield. This is because there are a lot of positives like demand-supply favour and bond inclusion,” he said.