FPIs shy away from G-Secs, FAR inflows to stay volatile

Synopsis

The first week of the month saw inflows of ₹4,970 crore as funds flowed into Indian debt in anticipation of a rate cut. The second week, however, saw outflows of ₹8,163 crore as a rate cut materialised and the rupee touched record lows, making Indian bonds less attractive to foreign investors, experts said.

Mumbai: Overseas interest in debt placed in the fully accessible route (FAR) remained markedly volatile through February, reflecting strategic flows and ebbs on either side of the biggest policy event in nearly five years - a reduction in benchmark rates.

The first week of the month saw inflows of ₹4,970 crore as funds flowed into Indian debt in anticipation of a rate cut. The second week, however, saw outflows of ₹8,163 crore as a rate cut materialised and the rupee touched record lows, making Indian bonds less attractive to foreign investors, experts said.

The third and fourth weeks of February saw inflows of ₹4,797 crore. On a net basis, inflows during the month touched ₹1,388 crore, CCIL data showed.

Indian bonds are now part of three global indices - the JP Morgan emerging market index, the FTSE Russell index and the Bloomberg Emerging Market local currency government bond index.

Agencies

Indian bonds were included in the Bloomberg index last month, but economists did not expect large inflows as the total assets under management of the index is not significant.

Fund managers do not anticipate significant inflows into index-eligible government bonds, due to an uncertain global environment as assets under management in global emerging market indices have been declining.

"The rupee volatility has added to the anxiety of foreign investors, which has led to outflows. It has been two months since Donald Trump took office, and I think we will have to wait for another six weeks or so for things to settle down," said Anshul Chandak, head of treasury at RBL Bank. "Overall, the outlook on emerging market bonds is not very favourable," Chandak said.

The total inflows into index-eligible bonds have tapered from a peak of ₹22,005 crore seen in August 2024, the month when Indian debt was first included in the JP Morgan emerging market index , the CCIL data showed.

The 10-year US Treasury bond, which was trading at a yield of 4.50% on February 21, was down to 4.27% on Thursday, according to LSEG data. The fall in yields came after a series of reports signalled that the world's biggest economy was facing growing challenges from elevated borrowing costs and inflation.

"Foreign flows into Indian debt are expected to be volatile. From a long-term perspective, US yields are expected to be elevated and there are increased external sector vulnerabilities. Hence, portfolio inflows into emerging countries like India are likely to remain on a cautious footing," said Anubhuti Sahay, head of India economic research at Standard Chartered Bank.

Inflows could go up if the rate cut by the Reserve Bank of India is higher than the already anticipated 50 basis points, Sahay said.

In contrast to the 10-year US Treasury, the benchmark 10-year Indian government bond yield closed at 6.70% on Thursday. Higher bond yields raises the cost of borrowing for Indian companies as government bond yields are the reference gauge for pricing corporate debt.

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