FAR securities attract Rs 75k cr foreign inflows since JP Morgan inclusion

Government securities designated under the fully accessible route (FAR) have seen a net inflow of Rs 4,530 crore in February so far, as foreign portfolio investors (FPIs) increased their positions in expectations of softening yields driven by rate cut by the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC).

 

Foreign investors had net bought Rs 14,430 crore worth of FAR securities in January.

 

After the official inclusion of domestic securities in the Bloomberg Index services’ Emerging Market Local Currency Government Index starting January 31, bonds designated under FAR had received Rs 9,000 crore inflow the same day.

 

The domestic rate-setting panel had cut the repo rate by 25 basis points (bps) to 6.25 per cent on Friday (February 7). The debt segment witnessed a net outflow worth Rs 2,658 crore in January.

 

The yield on the benchmark 10-year government bond settled at 6.70 per cent on Tuesday, against previous close of 6.69 per cent.

 

“The inflows in the FAR segment were on expectations of rate cut. A 50 bps rate cut is already factored in, that means additional 25 bps rate cut in April,” said the treasury head at a private bank. “Additionally, the OMO auctions by the RBI is positive for the bond market,” he added.

 

The RBI has been conducting OMO purchase to infuse liquidity in the banking system. The net liquidity was in a deficit of Rs 1.96 trillion on Monday, according to the latest data by the RBI.

 

Since the official inclusion of domestic government bonds in the JP Morgan indices on June 28 last year, FAR securities have received a total of around Rs 75,352 crore worth of net inflows so far. 

 

JP Morgan Chase, the largest US commercial bank, had also announced inclusion of Indian Government Bonds (IGBs) in its benchmark Emerging-Market Index Global Diversified (GBI-EM GD) index.

 

FPIs have been particularly active in the belly of the curve (7-14-year bonds) as financial year 2024-25 (FY25) approaches its close, seeking attractive yields in this segment. Additionally, the RBI has been scheduling these bonds for OMO purchases, further supporting demand.

 

Notably, the 10-year government security is set for its final auction of the financial year this Friday.

 

“The belly of the curve is very much in demand because the market is thinking that there is an additional buyer, that is the RBI,” said a dealer at a primary dealership. “The supply of 10-year bonds will also be the last this Friday in the current financial year, which is also leading to demand,” he added.

 

Only Indian government bonds issued by the RBI under FAR are included in the JP Morgan index. All FAR-designated government bonds maturing after December 31, 2026 are eligible. India's weight, post-inclusion, is expected to reach the maximum weight threshold of 10 per cent in the GBI-EM GD index, and approximately 8.7% per cent in the GBI-EM Global index.