Foreign portfolio investors (FPIs) poured in nearly $400 million into Indian bond markets two days after the Narendra Modi-led BJP government won a majority in the Lok Sabha elections, signalling a positive sentiment.
Global funds invested $216.3 million last Friday, a day after the election results were announced. It was the highest single-day inflow in the past two months. On Monday they invested $156 million. In May so far,they have bought $142 million worth of debt on the back of an outflow of $1.5 billion in April.
The benchmark government bond—7.26% yielding notes maturing in 2029—fell by 2 bps to close at 7.14% on Tuesday, the lowest since April 5, 2018.
Money market dealers believe the possibility of a rate cut by the central bank on June 6 and improved liquidity conditions through open market operations (OMOs) are the reasons for the rally.
“Currently, there are a lot of positive factors at play, which will help the fixed income market to flourish,” said Mahendra Jajoo, head-fixed income, Mirae Asset Global. “We expect the RBI to cut rates by 12.5 basis points (bps) in the June monetary policy meet leading the sovereign bond yield to trade between 7-7.10%,” added Jajoo.
Dealers also believe the central bank will keep the markets in surplus liquidity conditions in the coming months as it tries to fix problems with the troubled non bank financial companies (NBFC) sector. The RBI has already infused `25,000 crore through OMOs in May, and has said it plans to infuse `15,000 crore in June.
The quota for FPI investment in gilts is Rs 2.34 lakh crore as on May 28, according to CCIL data; the utilisation as on May 28, was 65.96% for gilts. The NSDL data shows that as of May 27, the limit for FPI investments in corporate bonds is `3.03 lakh crore. The utilised level is 68.63%. FPIs invest in various debt market instruments such as government bonds (G-secs), state development loans and corporate bonds, but with prescribed limits and restrictions by the central bank.