FPIs shunning Indian debt for other markets
At Rs 43,024 cr and climbing, sales may gain momentum after this week's US rate hike
 "FPIs shunning Indian debt for other markets")
Foreign portfolio investors (FPIs) have stepped up their selling from the domestic bond market, following Donald Trump’s surprise victory in the US Presidential election and the demonetisation exercise at home.
In the past one month, FPIs have pulled out Rs 33,886 crore ($5 billion) from the domestic market, taking the entire year-to-date 2016 selling tally to a net Rs 43,024 crore ($6.3 billion). Considering an imminent rate hike by the US Federal Reserve by the end of this week, experts say the pull-out may not end soon, making the year one of the worst in terms of foreign outflows in bonds. The year 2013 saw the largest pull-out of nearly Rs 51,000 crore ($8 billion) after the US Fed said it would taper its quantitative easing programme.
In both 2013 and 2016, the yield on the 10-year US Treasury note came up from below two per cent to 2.4 per cent in a short span. A rise in US gilt yields reduces the attractiveness of Indian debt, prompting FPIs to sell. On Monday, the 10-year US Treasury yield touched 2.5 per cent. The Indian 10-year gilt yield in 2013 was over nine per cent; it is now 6.41 per cent, rising from 6.20 per cent last week.
Complicating the matter this time is demonetisation, which has induced uncertainties about India’s growth potential and the prospect of an interest rate cut by the Reserve Bank of India (RBI) that will lower the interest rate differential between the US and India. Yield-chasing investors are shunning Indian debt, which no longer offers a sure and attractive return.
| Ebb & flow | |
| Outflows this year are most since 2013 | |
| Year | FII flows in debt ($ billion) |
| 2012 | 7.2 |
| 2013 | -8 |
| 2014 | 26 |
| 2015 | 7.6 |
| 2016* | -6.3 |
| * Year-to-date (YTD) till Dec 9 | |
| FII flows in debt ($ billion) | ||
| While most emerging markets (EMs) have seen outflows in recent months, India is the only major EM with negative flows in 2016 | ||
| India vs EM | ||
| YTD | Since Oct 1 | |
| India | -6.3 | -6.6 |
| Indonesia | 7.5 | -1.6 |
| Malaysia | 2.9 | -1.9 |
| South Korea | 11.98 | 0.6 |
| Thailand | 9.5 | -2 |
| Brazil | 26.99 | 3.3 |
| Philippines | 0.26 | -0.5 |
| Sources: Bloomberg, Sebi | ||