Sharp FPI outflows unlikely amid high US Treasury yields: ICICI Sec

Domestic brokerage says US yields, nearing a 16-year high, are at the upper range, as inflation is moderating

Foreign portfolio investor (FPI) flows have turned tepid this month amid a spike in the US bond yields. The 10-year US bond yield is currently hovering around its 10-month high of 4.303 per cent. If it breaches its October 2022 mark of 4.338 per cent, then it will climb to its highest level since 2007.
 

Surging bond yields have sparked concerns of acceleration in FPI outflows from the domestic market. However, brokerage ICICI Securities believes that the worries could be unfounded.
 

“The most recent surge in US yields -- from about 3.75 per cent to 4.3 per cent -- was triggered by the rating downgrade by Fitch and is putting pressure on FPI flows towards India. However, the US 10-year bond yield is likely to be near its upper range given the outlook for inflation. This should alleviate concerns around FPI outflows even as structural domestic equity flows in India continue to be positive as evidenced by record-high SIP (systematic investment plan) flows,” say Vinod Karki and Niraj Karnani, strategists at ICICI Securities.
 

Current core inflation trends and forward projections do not indicate further flare-up in inflation in the US. It means the medium-term outlook for rates continues to be benign, they add.
 

Since the 2019-20 financial year (FY20), the cumulative FPI flows into India are second only to China. If not for the $2.5 trillion investment in FY21, the overseas flow figure for China also appears grim. Despite recent softness in foreign flows on a trailing 12-month basis, FPIs flows into domestic stocks are $20.4 billion — one of the best among emerging and developed markets.

Aggregate FPI holdings currently stand at Rs 53.2 trillion, implying 17.4% holdings of domestic equities, up from 17 per cent in June 2022.