FPI inflows into FAR bonds fall 74% in July as crude, index delay weigh

Foreign investors slowed purchases of FAR government securities after a record June as higher crude oil prices and uncertainty over Bloomberg index inclusion hit sentiment

Foreign portfolio investment (FPI) in India’s government securities under the “Fully Accessible Route” (FAR) sharply slowed in July so far after a record month in June.

 

This is owing to sentiment dampening because of a rebound in the prices of crude oil and continued uncertainties about India’s inclusion in the Bloomberg Global Aggregate Index, according to market participants, including the treasury head of a public-sector bank.

 

Foreign portfolio investors net bought around ₹10,814 crore in FAR securities in July. That is a 74 per cent decline from the record ₹41,774 crore pumped in during June, according to the data of Clearing Corporation of India Ltd.

 

Bloomberg Index Services has been reviewing whether to include Indian FAR bonds in its flagship Global Aggregate Index, a benchmark tracked by nearly $3 trillion in passive assets globally. This is after deferring a decision in January this year, citing operational and market infrastructure concerns, including settlement processes and post-trade taxation issues.

 

The central government in June exempted foreign investors from taxes on interest income and capital gains on specified government securities as part of a broader package aimed at deepening the domestic bond market and attracting foreign capital.

 

Additionally, the Reserve Bank of India expanded the Fully Accessible Route to cover all new issuances of 15, 30- and 40-year government securities and eased investment norms for overseas investors.

 

Market participants said anticipating a positive decision from Bloomberg had been a key driver of the surge in June inflows.

 

“In June, apart from ceasefire, half the inflow was due to the expectation of inclusion in the Bloomberg index,” said the treasury head at another state-owned bank.

 

Market participants said that a formal decision from the index provider was now expected in seven to 10 days. Expectations of the timeline have shifted several times already this year, having earlier been pegged to both January and June.

 

Further, market participants said the yield on the benchmark government bond could retest levels last seen when oil prices had corrected sharply, potentially softening to 6.70 per cent in the near term.

 

The yield on the benchmark 10-year government bond settled at 6.78 per cent, showing little change from the previous close of 6.77 per cent.

 

“We are in a state where we don’t know whether the peace agreement holds good or not. There is no fresh attack or counter-attack by either side, but we are still not aware whether it will stop here,” said a market participant.

 

“People want to go light a bit. That’s the reason there is some selling pressure. But if crude oil remains at this level, eventually buying will come back,” the person added.