FPI net inflows into debt market hit highest amount in past 6 year

Inflows doubled in August from July on bond indices inclusion hope

Foreign portfolio investors (FPIs) have pumped Rs 28,216 crore into the Indian debt market so far this year on a net basis — the highest amount in the past six years.
 

In 2023, June saw the highest FPI inflows into debt securities at Rs 10,325 crore. The inflows moderated in July due to increased uncertainty in the market. In August, they have almost doubled compared to July on the optimism of India’s inclusion in international bond indices, coupled with disappointing global economic scenarios, which have pushed investors to seek diversification, according to market participants.
 

FPIs have invested Rs 6,067 crore into Indian debt in August (till 29th), as against Rs 3,113 crore in July, data from the National Securities Depository Limited (NSDL) showed. With the exception of March, FPIs were net buyers of Indian debt every month this year.
 

Naveen Singh, head of trading and executive vice president at ICICI Securities Primary Dealership, said there was probably “some optimism” about the inclusion of Indian government securities in global bond indices. “So, some of those FPIs might be pre-empting that in anticipation,” he said.

Singh said the “need for diversification” was also pushing them. “Definitely, they want to have diverse exposure to Asia and emerging markets, so these things would be driving. Otherwise, the bond markets have not performed to that extent…I don't think there’s so much optimism that the dollar is going to get weaker or the currency is going to get stronger,” he added.
 

The talk of the potential inclusion of Indian government bonds in global bond indices gained traction following the release of a report by an inter-departmental group within the Reserve Bank of India (RBI) recently. The report underlined that the benefits derived from incorporating government bonds into global indices outweigh the associated risks. 

In 2022, prominent index providers, including JP Morgan and FTSE Russell, maintained their interest in Indian government bonds by retaining them in their watchlists. A review is due at the end of September.
 

FPIs emerged as net purchasers of Indian debt in 2023 for the first time in a span of four years. The most recent instance of FPIs being net buyers was recorded in 2019, when they invested Rs 24,058 crore into bonds.
 

“One of the major reasons is disappointing macros in China. Largely, the real estate scenario and, in general, the credit scenario doesn't look too good. So obviously, there will be a shift of preference towards a country like India where macros are very good. Bank balance sheets appear to be quite clean and resilient, and the real estate is also not under major duress as of now. Plus growth numbers are expected to be quite decent,” Aditya Vyas, chief economist at STCI Primary Dealer Ltd, said.
 

“The only thing is that right now we are seeing that US yields are close to, just getting off the peak. So, that could be a deterrent, but it doesn't seem to be stopping the flows as of now,” Vyas added.
 

Even though FPIs have been net purchasers, they have scarcely utilised the RBI’s established thresholds for government and corporate bonds. Eligible FPIs had only made use of 29.3 per cent of the specified ceiling of Rs 2.68 trillion for central government securities as of Tuesday. Similarly, the utilisation of the upper limit of Rs 6.68 trillion for corporate bonds was even less, standing at 15.71 per cent.