After four months of outflows, foreign portfolio investors’ (FPI’s) fund flows into Indian debt continue to remain sluggish, with July seeing a net outflow of $53.51 million so far.
With the onslaught of Covid-19, March had seen the highest monthly outflows from debt at over $8 billion. Except February, all other months in the first half of calendar year 2020 have witnessed net FPI outflows from the debt market.
Manish Wadhawan, founder and managing partner at Serenity Macro Partners, said FPIs were not very comfortable with the fiscal situation of the government — the Centre as well as the states — due to the slowdown and the uncertainty with respect to Covid-19. “Right now, the bond yields and the interest rates are at multi-year lows. This is also the outcome of the ultra-loose monetary policy followed by the RBI and central banks worldwide. After the current crisis, as normalisation begins, central banks might withdraw the extra stimulus, which might result in bond yields hardening. That could be a deterring factor for the FPIs. The allocation to India is not stacking up on the FPI radar as of now, among emerging markets,” Wadhawan said.
A good part of the FPI selling is understood to be the outcome of the selling by a single large fund. “A large international fund, that had bought Indian debt in 2014-2016, has sold huge amounts of bonds, especially central government securities, since March — presumably to the tune of about $5 billion. A reasonable quantum of FPI selling in Indian debt could be attributed to this,” said a market expert, not willing to be named.
Despite the continuous FPI selling, a barrage of measures from the RBI has helped keep the yields down with the benchmark 10-year yield remaining below the 6%-mark. Another issue that has been worrying market participants is the oversupply of bonds in the market.
According to a Care Ratings report, the aggregate amount raised by the government so far during the current fiscal is Rs 4.1 lakh crore — 64% higher than the corresponding period last year. This is around 35% of the revised government market borrowing limit of Rs 12 lakh crore for the year and 69% of the amount to be raised in the H1-FY21 (Rs 6 lakh crore), the report stated.
The central bank has started addressing the issue of over-supply of bonds due to the additional government borrowings by announcing special open market operations (OMOs).