By Manish M Suvarna

Foreign Portfolio Investors (FPIs) pulled out nearly $369.37 million of the Indian debt market in February, after the government announced a higher borrowing programme in the Union Budget for the next fiscal year. In addition, the market was expecting an announcement on the inclusion of bonds in global indices but that too did not happen. According to data compiled from NSDL, FPIs pulled out $369.37 million in February from the debt market, as compared to inflows of $652.08 million in January.

The sell-off by FPIs was also seen because of higher borrowing announced in the Union Budget for the next fiscal. This led to a sell-off in the bond market, causing a rise in yields to a 30-month high. The government has projected market borrowings of `14.95 lakh crore and a net borrowing of Rs 11.2 lakh crore to bridge the fiscal deficit gap. On Wednesday, yields on benchmark securities ended up at 6.8145% due to a sharp surge in crude oil prices. Portfolio investors were actively investing in the Indian debt market in January, as they were expecting the government to announce the inclusion of Indian bonds in the global bond indices. But sentiments dampened after there were no such announcement during the Budget speech.

“The absence of any announcement of Indian bonds inclusion in the global index in Budget speech and higher government borrowing programme led FPIs to pull money from Indian debt market. They were net buyers in January as there was hopes of India bond index inclusion to be announced in the Budget,” said Lakshmi Iyer, CIO (debt) & head products, Kotak Mahindra Asset Management Company.

RBI governor Shaktikanta Das, at the post monetary policy press conference, said the inclusion of Indian bonds could attract greater flows and could expose the country to a greater degree of foreign exchange rate risk. The inclusion of Indian bonds in global indices has also been delayed due to certain demands of index providers such as JPMorgan Chase & Co relating to a tax issue.

Market participants said buying from FPIs was not expected in March considering the rise in policy rate globally, a surge in crude oil prices and geopolitical tensions between Russia and Ukraine.

“The recent geopolitical turmoil may mean some vulnerability on EM currencies. So, March may not see any meaningful buying from FPIs,” Iyer added. They may also want to wait and watch for cues from the central bank to support higher government borrowing.