FPIs exit domestic debt market as bond yield gap with US shrinks

Foreign investors were net sellers of FAR securities in October and November, driven by lower-than-expected growth in the second quarter of the current financial year

Foreign portfolio investors (FPIs), which returned to the domestic debt market in December after two consecutive months of net selling, started withdrawing again in January.

 

This came as the yield spread between US Treasury yields and domestic government bond yields narrowed, according to market participants.

 

They said that the first quarter of the year poses significant challenges for both the Indian bond and equity markets.

 

This is because the yield spread between the 10-year US bond yield and domestic benchmark 10-year government bond yield has narrowed by 13 basis points (bps) so far in January.

 

The next 2-3 months will be particularly difficult to attract capital, apart from any inflows tied to index-related adjustments, they said. 

 

Foreign investors bought a net Rs 7,080 crore worth of government securities designated under the fully accessible route (FAR) in December. Meanwhile, they have sold a net Rs 3,409 crore worth of FAR securities in January so far, according to data by the Clearing Corporation of India (CCIL).

 

“The first quarter of the year is going to be very tricky for the Indian bond and equity markets. Flows will be tricky because the spread has shrunk,” said Anshul Chandak, head of treasury at RBL Bank.

 

Foreign investors were net sellers of FAR securities during October-November, driven by lower-than-expected growth in the second quarter of the current financial year. They sold a net Rs 5,187 crore worth of FAR securities in November.

 

India will join the Bloomberg Index services’ Emerging Market Local Currency Government Index starting January 31, 2025.

 

Since the official inclusion of domestic government bonds in the JP Morgan indices on June 28 of the current year, FAR securities have received over Rs 50,000 crore worth of net inflows so far.