The West Asia crisis seems to have spooked foreign portfolio investors (FPIs) into withdrawing from Indian equities, but they continue to be bullish on government securities (G-Secs).
Last week, when the FPIs pulled out as much as Rs 37,039 crore from the equities market, they were net buyers of Rs 4,637 crore in G-Secs through the FAR route.
“With shorter tenure yields expected to fall faster than longer tenure yields, technically called bull steepening, FPIs find themselves in their preferred space. Although some little sell-off may happen owing to the ongoing turmoil, nothing significant is expected to happen in the bond market,” a dealer with a foreign bank said.
In addition, the inclusion of Indian government bonds into the JP Morgan Global Market Index-Emerging Suite has helped create a positive atmosphere for the G-Secs. The inclusion, which happened on June 28, is expected to bring foreign inflows of around US$ 30 billion in the period of 10 months. With the inclusion, FPI ownership in the G-sec market is expected to rise to 3.5-4%, dealers said.
Further, the Bloomberg Index will also include government securities into the index, starting from January 31 in a phased manner of 10 months, making the outlook for G-Secs brighter, dealers said.
What has also helped is that the FPIs are not so worried about the decline in the rupee because the RBI has consistently intervened to ensure that the Indian currency does not go into a free fall.
“For foreign investors, macros and stability in the currency are very important parameters to invest in. So, if there is quite an assurance from regulators’ side and the central government’s side, then the image of India looks promising to them, urging them to invest more in G-secs,” a dealer with a state-owned bank said.
Other factors like the government’s plan to lower the fiscal deficit to 4.9% by March and the long-term target of 4.5% by FY26 have also boosted the confidence of the bond market players.