Foreign portfolio investors (FPI) continue to remain bullish on Indian debt with the year-to-date foreign investments amounting to $7.98 billion — higher than that in most other emerging markets.
FPIs have continued to hold on to Indian debt in the face of a persistent volatility in global markets. This is reflected in that the fresh supply of government bonds in October was immediately picked up by FPIs and subsequently freed up limits on government securities (G-secs) were also acquired at a premium. As on December 7, FPIs have utilised 99.67% of their investment limit in G-secs.
Indian corporate paper offers attractive yields which is one reason why foreign investors have invested in them. Although incremental inflows remained subdued since April, latest data shows that FPIs utilised 74.47% of their $51 billion investment quota in corporate bonds — a modest fall from the 77.43% in April.
It must be remembered that FPI flows into the Indian market are restricted with separate caps for government securities and corporate bonds. Moreover, the central bank had earlier put restrictions on the residual tenure of some securities but some of these were later relaxed.
Compared to the $7.98 billion that foreign investors put into Indian debt so far in 2015, Indonesia has seen inflows of $6.81 billion, while Malaysia has seen $2.68 billion and Philippines and Thailand have received $1.32 billion and $0.096 billion respectively. South Korea has received $30.67 billion, while Russia saw $11.23 billion of net foreign inflows so far this calendar year.
The highest inflows into India were in January when foreign investors poured in $3.72 billion. The highest outflows were seen in May at $1.28 billion when the global markets were in turmoil.
Ever since the US Federal Reserve indicated a possible hike in interest rates this year, global bond markets have witnessed multiple bouts of sell-off. The Greek crisis and the Chinese equity meltdown also contributed to the churn of foreign money into safer instruments.
Ashish Vaidya, head of trading and asset liability management at DBS Bank India, believes it would be incorrect to compare yearly flows. “In 2014, we saw foreign portfolio investors providing considerable allocation to emerging market debt. This year, we saw a fall in that allocation with fund managers moving to safer havens after multiple bouts of volatility over Fed rate hike fears, and other factors continued to rattle markets,” Vaidya said.
The imminent lift-off by the Fed and an year-end portfolio churn has had some effect on the sentiments. In November, FPIs have sold $552.01 million of Indian debt while in October, net inflows were $2.4 billion even as the market witnessed fresh supply of government securities.
Vaidya also observes that part of the fall in foreign inflows into Indian debt could also be attributed to the commodity cycle downturn, which has lead to a cautious exposure in the commodity complex high yield segment of the market.
“This year we saw a fall in commodity prices which widened the spreads on papers issued by players in this segment. Foreign portfolio investors (FPI) look at emerging market debt for their attractive yields. Since, most of the high yield papers are issued by commodity players, the widening of spreads marked a fall in the risk appetite of FPIs, leading to a partial shift away from this segment,” he said.