FPIs infuse ₹22,419 cr in debt markets; What’s attracting them to bonds?
FPI inflows are likely to increase further due to India’s rising share in the MSCI Emerging Markets index, global brokerage firm CLSA said in a note. India narrowed the gap with China in MSCI’s Global Standard index, which tracks emerging market stocks for investors, after the latest revision.
‘’FPIs are steadily increasing their buying in debt market. They have bought debt to the tune of ₹22,419 crore in February on top of the ₹19,836 crore which they bought in January. This trend of steady debt investment is likely to continue,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Index provider MSCI raised India’s weightage to an all-time high of 18.2 per cent, which came into effect at the end of February. India could witness up to $1.2 billion of passive foreign flows after the MSCI February review, Nuvama Alternative and Quantitative Research said in a note.
“It is crucial to acknowledge the strong macroeconomic, corporate fundamentals and macro stability that underpin India’s equity markets and their valuations,” said Mike Shiao, chief investment officer, Asia ex-Japan at Invesco.
Among individual sectors, auto and pharma stocks saw buying interest, while foreign selling continued in financials. FPIs have offloaded financial services shares worth about ₹40,000 crore in the first two months of 2024, triggering a five per cent drop in the financials index over the same period.
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.
What’s attracting FPIs to Indian debt markets?
1.Inclusion of bonds in JP Morgan index
According to market experts, the trigger event has definitely been the announcement to include Indian government bonds in the JP Morgan GBI-EM Global Diversified Index (and other related indices) from June 28, 2024, with a weight of 10 per cent, staggered over 10 months.
According to analysts, this inclusion will raise FPI ownership in Indian GSecs to around 3.5 per cent–four per cent by FY2025, up from 1.6–1.7 per cent 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.
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.
2.US Bond Yields
Market experts say that normally when the US 10-year yield rises above 4.15 per cent, the FPIs sell heavily. US bond yields increased to around 4.16 per cent in January from approximately 3.88 per cent in December 2023, leading to capital outflows from equity towards higher-yielding US bonds.
Also, the 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.
“For February FPIs have turned buyers in equity for ₹1,539 crore. This is despite the US bond yields ruling high with the 10-year yield at around 4.25 per cent. FPIs may again turn sellers in some of the coming days. But they are unlikely to sell aggressively because their selling is not having any impact on the market which is setting new record highs,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
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: 08 Mar 2024, 07:16 PM IST
