Foreign portfolio investors (FPIs), including large sovereign wealth funds, have bought heavily into Indian bonds over the last two weeks, ignoring the sharp decline in bond prices. The second half of January witnessed considerable volatility in the bond market, driven by multiple newsflow, be it the Reserve Bank of India (RBI) deputy governor Viral Acharya’s comments on interest rate risk of banks or chief economic advisor Arvind Subramanian’s take on the monetary policy when speaking on the Economic Survey. However, this was the time when FPIs played contrarian, buying over a billion dollars (on a net basis) of Indian bonds – a period when the benchmark yield rose 21 basis points to 7.43%. In 2018, so far, foreign investors have infused $1.35 billion whereas in the same period last year FPIs were net sellers of Indian debt, having sold $409.47 million.
The optimism of foreign investors was reflected in the high interest seen from them in the auction of investment limits for central government securities. On Monday, FPIs put in bids worth Rs 8,306 crore ($1.31 billion) against a notified amount of Rs 4,569 crore ($719 million). They were even willing to pay as high as 8 basis points to acquire the limits. Market experts believe the primary factor attracting external fund flows is the fact that yields on Indian paper still make the carry very lucrative, despite a rise in interest rates across the world. Moreover, the rupee has also been stable this year.
The only dampener to fund flows could be rising oil prices. If Brent crude prices continue their surge to the $80/barrel mark, the rupee may take a hit despite the weakening dollar, market experts say. “We already have a huge trade deficit number. If oil prices continue to rise to the $80/barrel mark, the current account deficit is definitely going to get hit. That might reverse any gains made by the rupee, thereby leading to a reversal in the FPI flows into the debt segment,” said a market expert.