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

Foreign portfolio investors (FPIs) have pushed US$ 3.40 billion (Rs. 28,216 crore) into the Indian debt market this year, the most in the last six years. The highest FPI inflows into debt securities in 2023 were US$ 1.24 billion (Rs. 10,325 crore) in June. Due to growing market uncertainty, inflows moderated in July.

According to market insiders, they nearly doubled in August compared to July on the hope of India's participation in international bond indices, combined with disappointing global economic possibilities, which has encouraged investors to seek diversification. According to data from the National Securities Depository Limited (NSDL), Foreign Portfolio Investors (FPIs) invested US$ 732.31 million (Rs. 6,067 crore) in Indian debt in August, up from US$ 375.75 million (Rs. 3,113 crore) in July. With the exception of March, FPIs have been net buyers of Indian debt every month this year.

According to the Head of trading and executive vice president at ICICI Securities Primary Dealership, Mr. Naveen Singh, there is undoubtedly "some optimism" about Indian government securities being included in global bond indices. According to Mr. Singh, they were also being pushed by the "need for diversification". He continued, “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”.

Following the recent release of a report by an inter-departmental group inside the Reserve Bank of India (RBI), there has been increased speculation over the inclusion of Indian government bonds in global bond indices. The paper emphasised that the benefits of including government bonds in global indices outweigh the associated risks. Leading index providers, such as JP Morgan and FTSE Russell, maintained their interest in Indian government bonds in 2022 by keeping them on their watchlists.

For the first time in four years, foreign portfolio investors (FPIs) became net purchases of Indian debt in 2023. The most recent instance of FPIs being net buyers was in 2019, when they invested US$ 2.90 billion (Rs. 24,058 crore) in bonds.

Chief Economist at STCI Primary Dealer Ltd, Mr. Aditya Vyas said that “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”.

Despite being net purchasers, FPIs have rarely used the RBI's declared thresholds for government and corporate bonds. Only 29.3% of the declared ceiling of US$ 32.34 billion (Rs. 2.68 trillion) for central government securities has been used by eligible FPIs. Similarly, the use of the US$ 80.63 billion (Rs. 6.68 trillion) upper limit for corporate bonds was considerably lower, at 15.71%.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.