FPI selloff hits Rs 28,677 cr in Nov amid rising US yields, strong dollar

No immediate relief expected amid shrinking US-India bond yield spread, subdued earnings

Foreign portfolio investors (FPIs) continue to pull out from both Indian debt and equity markets, driven largely by rising US bond yields and a strengthening dollar.

 

On a net basis, they have offloaded nearly Rs 8,750 crore worth of government securities under the Fully Accessible Route (FAR) this month (as on November 14), according to Clearing Corporation of India Ltd (CCIL) data. This follows net sales of Rs 5,142 crore in October.

 

On the equity front, FPIs net sold Rs 19,927 crore worth of stocks through November 14, building on Rs 91,983 crore of outflows in October.

 

The shift reflects broader global trends. Following Donald Trump’s victory in the presidential elections, expectations of expansionary fiscal policies in the US have buoyed demand for US debt securities. “US (benchmark Treasury) yields are currently around 4.40 per cent, while our (10-year) G-sec yields hover around 6.80 per cent, leaving a slim spread of 240 basis points,” noted Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank. When adjusted for rupee depreciation, “the value of foreign investors’ holdings in our government securities erodes further. Unless there is a reasonable spread between the two yields, the trend is unlikely to reverse.”

 

The yield on the benchmark 10-year US Treasury has risen by 17 basis points in November, so far, while the rupee has slid to a record low of 84.41 per dollar (as on Thursday). The Indian markets were closed Friday for Guru Nanak Jayanti. 

 

Also, optimism remains subdued. “I don’t see FPI flows rebounding immediately. The outflows may abate, but no one will rush to India because valuations and earnings don't compel anyone to do so. There will be a period of consolidation when the equity markets will trade around the current levels. Hopefully, earnings will start to pick up, and interest rates fall next year,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.

 

Still, some debt market participants believe the outflow could stabilise in a month or two, as India retains its appeal within emerging markets (EM).

 

Despite current challenges, India is better positioned within the EM segment, especially with expected index-inclusion inflows early next year, said Anshul Chandak, head of treasury at RBL Bank. “A lot of selling has happened because of the upcoming regime change in the US. Also, our macros have started to show signs of softening. With the new regime, people will go long in the US. Maybe in a month or two, the situation should settle down.”

 

India’s inclusion in key global bond indices is providing some optimism. The country will join Bloomberg’s Emerging Market Local Currency Government Index from January 31, 2025. This follows its addition to JP Morgan’s Global Bond Index for Emerging Markets (GBI-EM) in June. Since then, FAR-designated securities have attracted net inflows of Rs 52,890 crore, while the broader debt segment has seen Rs 37,259 crore in inflows.

 

However, not all FAR securities qualify for the JP Morgan index. Of the 38 bonds designated under FAR, only 27 meet the criteria, which include a minimum face value of $1 billion and over 2.5 years of remaining maturity. The inclusion process will be phased over 10 months, with a 1 per cent weight added monthly until March 2025, when Indian bonds will achieve a 10 per cent weight — similar to China.

 

The shift in FPI sentiment marks a sharp reversal. October saw the first net outflow in Indian debt markets since April, despite significant gains earlier in the year. Investment in FAR securities surpassed Rs 2 trillion within nine months of JP Morgan’s announcement. The milestone Rs 1 trillion mark was crossed as early as October 16, 2023.

 

In September 2023, JP Morgan had announced that it would include government papers, issued by the Reserve Bank of India, under the Fully Accessible Route in its widely tracked Government Bond Index-Emerging Markets.