FPIs stay bullish on debt, pump in Rs 10,000 cr in Aug after RBI rate cut

FPIs pulled out more than Rs 2,000 cr from equities during this period over higher stock valuations

Foreign investors have pumped in over Rs 10,000 crore in the Indian debt markets this month so far, following the RBI's decision to cut key interest rates.

However, in view of higher stock valuations, foreign portfolio investors (FPIs) pulled out more than Rs 2,000 crore from equities during this period.

According to the latest depository data, FPIs invested a net sum of Rs 10,419 crore (USD 1.6 billion) in the debt markets during August 1-12.

This comes following a net inflow of Rs 1.16 lakh crore in last six months from February-July 2017. Prior to that, they withdrew more than Rs 2,300 crore.

With the latest inflow, total investment in debt markets has reached over Rs 1.24 lakh crore (USD 19 billion) this year.

"FPI investments in debt have been robust for the last few months. While the run-up to the monetary policy saw some tepid flows, as investors remained cautious in the event of a no rate cut stance by RBI; FPI flows picked up right after the the 25 bps rate cut on August 2," Vidya Bala, head of MF research at FundsIndia.Com said.

Markets regulator Sebi, in early July, increased the FPI limit in central government securities, which provided a longer rope for them to pump in money.

"With the spread between US 10-year bond and 10-year India gilts at a good 4.2 percentage points even now, FPIs continue to seek opportunities in the Indian debt market with the rupee-dollar equation stable," she added.

Echoing similar views, Alok Agarwala, senior vice- president and head investment analytics at Bajaj Capital said: "Indian real policy rates as well as real treasury yields remain the highest among major economies except probably Brazil and Russia. Besides, a stable currency gives an added incentive to foreign investors".

The RBI in its latest monetary policy statement, accepted downside risks to growth and inflation hinting that their next action will be data dependent.

Agarwala said data is unlikely to improve in the very short term as the temporary adverse impact of GST implementation on growth is visible in the contraction in manufacturing and service sectors for July.

"In this scenario, Indian treasuries seem an attractive choice for FPIs. The Indian G-Sec yield curve is pretty steep (and hence attractive for term spread plays) barring the benchmark 10-year bond," he added.