Foreign portfolio investors (FPIs) have bought Indian debt for the third straight month in 2017, taking the total net investment to about $7.5 billion so far this year. The pace of investment, however, is likely to slow down in the coming months as the rupee comes off its recent highs and the interest rate differential between the US and India narrows, dealers in the bond market say.
In April, the net inflow into the bond markets was about $3 billion, compared with around $3.9 billion in March, which was the highest monthly inflow since December 2011, data on NSDL showed. In January, FPIs were net sellers to the extent of about $361 million, while in February, they bought debt worth about $893.55 million. The Indian market has been lucrative for foreign investors, with the benchmark bond yield rising and the spread between the US and Indian market widening. The appreciation of the rupee against the dollar was also a positive factor.
“India is the most attractive bond and currency market with fairly stable currency and robust yields, and that has spurred all this flows,” a trader with a foreign bank said. The high interest of the FPIs in Indian debt is reflected in the debt-limit utilisation levels. As of Tuesday, the percentage of limits utilised in central government securities was 77.11% in the general category. For corporate bonds, 80.89% of the limits have been utilised.
On March 31, the Reserve Bank of India had increased the limit for FPIs in central government securities to Rs 1.85 lakh crore from Rs 1.52 lakh crore. The limit for long-term FPIs, which include sovereign wealth funds, multilateral agencies, endowment funds, pension funds and foreign central banks, was increased to Rs 68,000 crore from Rs 46,099 crore.
The 10-year benchmark yield has gained about 34 basis points since the beginning of April. On Tuesday, it closed at 6.99%. The rupee touched a record high of Rs 63.93 per dollar earlier this week. On Tuesday, it closed at Rs 64.21 to a dollar.
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Traders are, however, cautious about FPI flows in the coming months. On one hand, the investors are expecting the interest rates in the US to rise sooner than later. Secondly, the rupee is likely to see a reversal after its recent record rally. A combination of both these factors could erode the attractiveness of the Indian market.
“In the near term, the inflows will definitely moderate. The Fed will hike rates, and we will have to see what impact it has on the US yields in the long term,” the trader with the foreign bank said. “I think the carry that the FPIs enjoy in India will still be lucrative enough, and I don’t see any fear of outflows. But how long will the inflows carry on is a valid question,” he added.