FPIs do U-turn on debt investment in India; check out how

By: |
Mumbai | July 20, 2016 6:06 AM

Foreign portfolio investors' (FPIs) net investment in debt instruments in July has crossed the $1 billion mark, with FPIs having net bought instruments worth $1.03 billion since the beginning of the month.

In July so far, there has not been a single session in which FPIs have sold bonds. This trend comes after a prolonged period of FPI selling. Between January and June, FPIs net sold bonds worth $1.92 billion. (Reuters)In July so far, there has not been a single session in which FPIs have sold bonds. This trend comes after a prolonged period of FPI selling. Between January and June, FPIs net sold bonds worth $1.92 billion. (Reuters)

Foreign portfolio investors’ (FPIs) net investment in debt instruments in July has crossed the $1 billion mark, with FPIs having net bought instruments worth $1.03 billion since the beginning of the month.

In July so far, there has not been a single session in which FPIs have sold bonds. This trend comes after a prolonged period of FPI selling. Between January and June, FPIs net sold bonds worth $1.92 billion.

The buying has primarily been on hopes that the soon-to-be announced next governor of the Reserve Bank of India (RBI) will be more aggressive in cutting interest rates. A pick-up in monsoon rains has also raised the outlook on inflation and interest rates.

Analysts believe that FPIs are likely to continue investing in domestic debt instruments for some time, primarily because of the higher reward for their risk. As on Tuesday, the yield on the US 10-year treasury was around 1.56%; while on the German 10-year bond, it was around -0.026%. Given the subdued interest rate scenario in developed economies, investors are increasingly turning to safe investments in emerging markets.

“FPIs buying debt instruments is also a function of what kind of return they will get for their investments in their own countries vis-à-vis India. So if you look at the bond yields there, India may seem very lucrative for a lot of investors,” Karthik Srinivasan, senior vice-president at ICRA, told FE.

Srinivasan also pointed out that the US Federal Reserve had earlier indicated that it might hike interest rates “in coming months”. But ever since Britain’s exit from the European Union, any rate hike has now been put on hold.

According to Ashutosh Khajuria, chief financial officer and president – treasury at Federal Bank, a significant portion of buying has happened as the Securities and Exchange Board of India raised the FPI investment limit in central government bonds to Rs 1.44 lakh crore as on July 5.

The increased buying of debt instruments, primarily government bonds, has resulted in the yield on the Indian 10-year benchmark bond falling. On June 1, the yield on the 10-year benchmark stood at 7.49%, but it has now slipped to 7.28%. In fact, the yield has fallen by around 17 bps in July itself, having started the month at 7.45%.

“Benchmark yields have come down to around 7.3% levels, partly due to buying by foreign portfolio investors who have bought $640 million worth of G-secs in July so far,” Khajuria pointed out.

Gr5

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