Foreign portfolio investors (FPIs) have turned net sellers in the debt market after two months, taking cues from the global market. Foreign investors have sold securities worth $370.27 million so far in October. They were net buyers in August and September with investments worth $1,839.31 million and $1,488.90 million, respectively.
“The clue for this lies in the events in the global markets. The way FPIs see it, crude prices are further hardening, the dollar has strengthened against the rupee and the overall macro too is slowly moving towards normalisation of rates or expectation of a rise in yield,” said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.
Additionally, foreign investors are looking at the yields in the US, which have consistently been moving upwards. This has led to sell-off by these entities in developing markets, including India. Over the past few weeks, US Treasury yields have risen sharply after the Federal Reserve signalled tapering its asset purchase programme. Usually, a rise in US Treasury yields narrows the spread with emerging market debt yield, making it less attractive to overseas investors.
Dealers with brokerage firms expect that any hike in the rate by the Federal Reserve in the upcoming months may increase chances of outflows. Along with this, a rise in crude oil prices is also weakening the sentiment of foreign investors. Higher Brent crude oil prices are a big concern for the Indian markets because the country imports 80% of its requirement. Higher prices increase inflationary risks and reduce economic growth. Currently, Brent crude oil prices were trading at $84.88 a barrel for the contract maturing in December.
Money market dealers expect that once yields on Indian bonds become attractive, one can can expect inflows into the debt segment from foreign players. “The current period is not attractive that is why we are witnessing outflows,” a dealer with a state-owned bank said.
Meanwhile, the rise in crude oil prices also puts pressure on G-Sec yields and market players began selling securities due to rising inflationary pressures. In the past few days, the yields on benchmark securities have risen 5-7 basis points. But still, it seems unattractive to foreign players and they are expecting more.
“Recovery theme has picked up for India, vaccinations number have crossed a billion doses and that means the central bank too would be keen to give the market a breather in terms of intervention,” Manglunia said.