Foreign portfolio investors have pumped Rs 26,836 crore into the Indian debt market in 2023 so far on a net basis, marking the highest amount in the past six years. June saw the highest FPI inflows into debt securities in 2023, at Rs 10,325 crore.
Inflows moderated in July due to increased uncertainty in the market. In August, they almost doubled as compared to July on the optimism of the inclusion of India in international bond indices, coupled with disappointing global economic scenarios pushing investors to seek diversification, market participants said. August witnessed the second-highest FPI inflows into bonds in the current calendar year.
FPIs pumped in Rs 6,067 crore into Indian debt in August, against Rs 3,113 crore in July, according to data from the National Securities Depository Limited (NSDL). With the exception of March, FPIs were net buyers of Indian debt every month this year.
“Probably because of some optimism that potentially there can be some chances of bond inclusion. So maybe some of those FPIs might be pre-empting that in anticipation,” Naveen Singh, Head of Trading & EVP at ICICI Securities Primary Dealership, said.
“And the diversification from other geographies is also pushing them. Definitely, they want to have diverse exposure in Asia and emerging markets, so these things would be driving, but otherwise, you know, the bond markets have not performed to that extent and even dollar-rupee, 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, so mostly it has been driven by the need for diversification,” Singh added.
The momentum surrounding the potential inclusion of Indian government bonds in global bond indices gained traction following the release of a report from an inter-departmental group within the Reserve Bank of India (RBI) the previous month. 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 within their watchlists. A review is due at the end of September, the end of the current quarter.
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 25,882 crore into bonds.
“One of the major reasons being 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. So obviously, one would prefer, and plus growth numbers are expected to be quite decent. 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,” Aditya Vyas, chief economist at STCI Primary Dealer Ltd, said.
Even though FPIs have been net purchasers, they have scarcely utilised the Reserve Bank of India’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 more minimal, standing at 15.71 per cent.