Apprehensive that the rupee could further weaken as crude oil prices soar, foreign portfolio investors (FPIs) have sold Indian bonds close to $1 billion so far in September. Sales in the equity market at close to $232.3 million between September 1 and 18 have been far smaller.
Since January, the rupee has lost 12% and closed at 72.3825 to the dollar on Wednesday. Noticeably, the US dollar Index — Dollex — has weakened by nearly 1% since the beginning of September.
Treasury yields in the US 10-year paper have been rising over the past couple of months and hit 3.07% on Thursday, the highest in almost four months. The yield on the Indian benchmark paper has jumped 7 basis points (bps) since the start of September and closed at 8.07 on Wednesday. Brent oil was ruling at around $79.83 levels per barrel on Thursday.
The weakening rupee could prompt foreign investors to offload more bonds, market observers said. Otherwise, their portfolios would continue to lose value. To be sure, other emerging markets which are vulnerable to rising crude oil prices have also seen sell-offs in their bond markets. Indonesian bond markets have witnessed a net selling of $1.2 billion in the same period.
Ajay Manglunia, EVP & head – fixed income, Edelweiss Financial Services, said FPIs remained net investors in August at $355 million, primarily because the rupee and yields had shown signs of stabilisation.
“In September, the rupee has been on a depreciating path and yields have been unstable, these are factors that have possibly triggered FPI outflows. The market has now factored in a 50 bps hike during the October meeting, with a few more hikes underway by the monetary policy committee,” Manglunia explained.
Sebi said after its recent board meeting that the proposed amendments in Sebi (FPI) Regulations, 2014 were discussed and broadly agreed upon. The revised circular will be soon issued separately, the regulator said. “Largely, we have agreed with what the HR Khan committee is saying,” said Sebi chairman Ajay Tyagi after the board meeting.
The RBI in its annual report earlier had highlighted that the CAD was expected to be largely financed by FDI flows.