FPIs turn net debt buyers after 3 yrs

The investors purchased a net ₹16,722 crore worth of Indian government and corporate bonds in the calendar year through June. FPIs net sold Indian bonds worth ₹1.31 trillion in the past three years ending 2022. The last time they were net buyers was in 2019, when they purchased ₹25,882 crore worth of bonds

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“I think it is to do with global fund managers reallocating funds to other EMs (emerging markets) like India from Russia, consequent to the Ukraine war, coupled with a stable currency and Indian bond yields remaining relatively less volatile,” said Madan Sabnavis, chief economist, Bank of Baroda.

The benchmark 10-year government bond yield has softened from a closing high of 7.43% on 8 March to 7.11% on Tuesday. This year, the bond yield fell to a low of 6.96% on 16 May before moving above the 7% psychological mark. Bond yields and prices have an inverse relationship. When yields fall, prices increase, and vice versa.

The Indian currency also has remained stable through June compared to the six months of the previous year. It moved between a low of 82.89 and a high of 81.12 to the dollar in the first half of 2023.

An attractive high-yield bond issue from the Shapoorji Pallonji Group also bolstered overall inflows.

“In June, there was a large deal where Shapoorji Pallonji Group company Goswami Infratech raised ₹14,300 crore. It was a high-yield and structured finance borrowing that received a lot of interest from FPIs who put in around 60-70% of the total offering,” said Ajay Manglunia, managing director and head of the investment grade group at JM Financial Ltd.

Manglunia said that in the government securities market, there is hardly any spread for FPIs to attract them, while in structured finance deals, funds looking for high-yield papers are quite active now and that has led to a jump in FPI investment in debt recently.

To be sure, FPIs’ debt inflows stood at ₹9,178 crore in June, the highest in any month this year, partly on account of this corporate bond deal. The promise of greater FPI inflows into corporate debt is likely if the rates of interest offered are attractive.

“On the corporate bond side, considering the bearish market, investors are not keen to invest at the current market level and want higher yields,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

The FPI buying has also raised hopes among some of a likely sovereign rating upgrade or inclusion into JP Morgan Government Bond Index-Emerging Markets (GBI-EM). “I am a bit surprised at the buying,” said Nilesh Shah, the group president and managing director of Kotak Mahindra Asset Management Co. “It might be a precursor to a rating upgrade or the much-anticipated debt index inclusion.”

India’s current rating stands at BBB-, a notch above junk rating, which, some feel, could be upgraded to BBB. In connection with the introduction of the bond index, a few issues, such as settlement, need to be thrashed out. India wants global bond index providers to consider local settlement. If India is included, it could attract FPI inflows of an estimated $30 billion just over the next year or so.

While FPIs have turned net buyers, they have barely utilized the RBI limits fixed for government and corporate bonds.

For instance, for central government securities, against the upper limit of ₹2.68 trillion, the eligible FPIs had utilized just 23.6% of the limit, or ₹63,186 crore, as of 3 July. In corporate bonds, similarly, the utilization was even lower at 15.63% ( ₹1.04 trillion) of the upper limit of ₹6.68 trillion.

Updated: 05 Jul 2023, 12:41 AM IST