FPIs find stability in Indian debt amid equity challenges
In January, FPIs injected a notable ₹19,800 crore into Indian bonds, marking the highest monthly inflow in six years, surpassing the inflows of ₹18,302 crore observed in December 2023. This positive momentum extended the ten-month streak of inflows in the debt market since April 2023, with the last recorded net outflow occurring in March 2023, amounting to ₹2,505 crore.
Also Read: After a strong 2023, FPIs turn net sellers in January 2024; will this trend continue?
Conversely, FPIs exhibited a divergent trend in the equity market, withdrawing ₹25,744 crore from Indian stocks in January. Before January, FPIs were net sellers in October 2023, divesting Indian equities worth ₹24,548 crore. However, in the subsequent months of November and December 2023, they shifted their stance, acquiring equities worth ₹9,001 crore and ₹66,135 crore, respectively.
Looking at the overall scenario in CY23, FPIs displayed substantial engagement in the Indian equity market, investing a total of ₹1.71 lakh crore. In the debt space, FPIs injected a total of 68,663 crore throughout 2023.
Notably, the calendar year 2023 marked a significant shift, with FPIs becoming net buyers of Indian debt for the first time in four years. The last instance of net buying of Indian debt by FPIs occurred in 2019, amounting to ₹24,058 crore.
Why are FPIs pumping money into the Indian debt market?
Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, outlined three primary reasons behind the increased infusion of funds by Foreign Portfolio Investors (FPIs) into the Indian debt market in January while exiting Indian equities at the same time.
Firstly, he pointed out that US bond yields increased to around 4.16% in January from approximately 3.88% in December 2023, leading to capital outflows from equity towards higher-yielding US bonds. Secondly, he highlighted that Indian equity has become one of the most expensive in the world, with the Nifty trading at a PE of around 21 based on FY24 estimated earnings, triggering selling in the Indian equity market.
Thirdly, Dr. Vijayakumar mentioned that some FPIs are engaging in front-running in the Indian bond market, anticipating increased flows after India’s inclusion in the JP Morgan Emerging Market Bond Fund.
Also Read: RBI Monetary Policy Committee meeting: Check the date, time, and where to watch
Looking ahead, he emphasised that FPI inflows into the equity market will hinge on trends in US bond yields and global as well as Indian equity market conditions. With recent corrections in US bond yields, significant FPI selling in February is unlikely. There may even be a shift towards buying, while inflows into the debt market are expected to persist, according to Dr Vijayakumar.
Inflows are likely to be strong
In September last year, JP Morgan announced that it will add Indian government bonds to its benchmark emerging market index. India’s Fully Accessible Route (FAR) securities will be included in the JP Morgan GBI-EM Global Diversified Index (and other related indices) from June 28, 2024, with a weight of 10%, staggered over 10 months.
According to analysts, this inclusion will raise FPI ownership in Indian GSecs to around 3.5%–4.0% by FY2025, up from 1.6–1.7% currently. In value terms, this move is expected to bring approximately US$30 billion in inflows in the same period.
India has been on Index Watch Positive since 2021 for inclusion into the GBI-EM following the Indian government’s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments. FAR bonds are securities that have no restrictions for foreign investors and are eligible for global index inclusion.
Also Read: Indian government bonds likely to be part of Bloomberg emerging market index from September 2024
In addition to JP Morgan, Bloomberg Index Services last month said it is soliciting feedback on a proposal to include India’s Fully Accessible Route, or FAR bonds, in its emerging market local currency index.
Lower fiscal deficit target
Further boosting the positive sentiment in the Indian debt market, the Indian government, in the interim budget, set a fiscal deficit target for FY24 at 5.8%. Surprisingly, the fiscal deficit target for FY25 has been set even lower at 5.1%, surpassing market expectations that ranged between 5.4% and 5.5%. This move has retained optimism in the market, with a long-term target of reaching 4.5% by FY26.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 05 Feb 2024, 11:49 AM IST
