FPIs turn net debt buyers in May ahead of JP Morgan index inclusion

10-year G-sec yield softens 20 bps in May so far

In a turnaround from April’s selling spree, foreign investors are increasing their holdings in debt securities as the JP Morgan Index inclusion for Indian government bond approaches.

In May so far, foreign portfolio investors (FPIs) have pumped Rs 7,427 crore into debt securities on a net basis, a significant shift from April when there was net selling of Rs 11,218 crore.
 

“According to the schedule given by JP Morgan, the weighting will be increased by 1 per cent every month. So, passive investors will have to buy to reduce the tracking error of the index,” said Naveen Singh, vice-president of ICICI Securities’ primary dealership.
 

In September 2023, JP Morgan had announced it would include government papers, issued by the Reserve Bank of India under the Fully Accessible Route, in its widely tracked GBI-EM. The inclusion process will start from June 28 and will be phased over a 10-month period, with a 1 per cent weighting included each month until March 31, 2025. Indian bonds will have a 10 per cent weighting, similar to China.

 

The FPIs are back in the market because they see chances of making money as yields are expected to cool off during the financial year, said the treasury head of a private bank. “They keep doing the rebalancing of their investments in different markets. The bond inclusion was one of the reasons for the FPIs to be attracted to the market.”
 

The yield on the benchmark 10-year government bond have fallen by 20 basis points (bps) in May so far. It settled at 7 per cent on Tuesday. During the last quarter of FY24, FPIs infused Rs 54,492 crore into the debt market, which led to a fall in the yield on the benchmark bond of 14 bps during the period.
 

The debt market saw a reversal of fortunes in April after a year of cons­i­stently robust monthly inflows from FPIs, due to the surge in US Treasury yields amid escalating geopolitical tensions. 

During FY24, domestic markets witnessed foreign inflows of Rs 3.23 trillion, a turnaround from the Rs 45,365 crore worth of outflow recorded in FY23. Of the total inflows, FPIs injected Rs 1.2 trillion into the debt segment, marking the highest influx since FY15, according to data on the National Securities Depository Limited.

With $250 billion of assets under management tracking the index, the market estimates that $25 billion inflows are expected during the period. According to the index inclusion criteria, eligible instruments are required to have a notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity.