FPIs sell ₹10,234 cr in debt mkt in April as yield spread hits 20-year low

Foreign Portfolio Investors (FPIs) have sold ₹10,234 crore worth of domestic debt on net basis in April so far as the yield spread between 10-year US Treasury bond and domestic benchmark 10-year bond narrowed to 190 basis points, lowest since September 2004, said market participants. 

 

This was the highest monthly outflow since April 2024, when foreign investors had net sold ₹11,218 crore.

 

“The outflows are due to profit-booking. We have moved from 250 basis points to 200 basis points yield spread as the normal spread given the new norms. The outflows will not sustain for a long time because there is fair demand for debt among foreign banks,” said the treasury head at a private bank.

 

The yield on the benchmark 10-year government bond has declined by 28 basis points in April so far driven by domestic demand, whereas the benchmark 10-year US Treasury bond yield rose by 36 basis points in the same period.

 

US Treasury yields climbed amid renewed inflation concerns due to trade tariffs tempering expectations of near-term rate cuts by the Federal Reserve.

 

“The daily activity of FPIs is quite higher than the outflow numbers that we are seeing. The JP Morgan flows are over, which is also one of the factors for outflows. Also, domestic conditions are quite favourable with inflation seen moderating and the rate cut cycle,” said the treasury head at another private bank. 

 

The total foreign portfolio investment in Indian government securities designated under the Fully Accessible Route (FAR) reached ₹2.96 trillion as of Thursday, against ₹3 trillion at the end of March of the current year, according to data by Clearing Corporation of India (CCIL) data.

 

On the other hand, a report by Nomura said that foreign investors who have been a significant source of buying activity over the past 12 to 18 months -- largely driven by the inclusion of Indian bonds in the JP Morgan index--are expected to remain a key source of demand in the current financial year. Estimated FPI inflows are projected to range between $10 billion and $15 billion.

 

“At this juncture, we see relatively low risk from India’s perspective. On the demand side, there are two key themes we’re focusing on. First, FPIs who have been a significant source of buying activity over the past 12 to 18 months-- primarily driven by flows related to the JP Morgan bond index inclusion-- are expected to remain a major source of demand in the current financial year. We estimate FPI inflows could range between $10 billion to $15 billion,” the report said.

 

“Notably, this momentum is expected to continue despite the formal inclusion process under the JP Morgan index coming to an end. That’s largely because India remains an attractive investment destination in the global context. Moreover, JP Morgan’s move to open up access to India’s bond markets has lowered entry barriers for FPIs, which should further support sustained inflows,” it added.

 

Since the official inclusion of domestic government bonds in the JP Morgan indices on June 28, 2024, the domestic debt segment has received around a net total of ₹28, 514 crore worth of net inflows so far.