Foreign portfolio investors continued to be net sellers of Indian debt for the fifth straight month this year as they sold $245.63 million worth of bonds on a net basis in the month of July. So far, FPIs have sold over $14.5 billion worth of Indian debt since the beginning of 2020.
With the onslaught of the Covid-19 crisis, March has been the worst month this year as far as FPI outflows from debt is concerned with foreign investors pulling out over $8 billion from the bond market.
Manish Wadhawan, managing partner at Serenity Macro Partners, said that as of now, the emerging market debt, including India and China, does not look too attractive to FPIs on account of the ultra low interest rates.
“There are fears surrounding the fiscal deficit and with inflation being on the higher side in recent times, the bonds have lost attractiveness at this point of time. Also, with the fear of central banks normalising monetary excess, there could be reversal of capital gains which could also be a deterrent for FPIs. We have seen the yields reverse in China as growth seems to have shown signs of reversal,” Wadhawan said.
Despite the selling by FPIs, bond yields have come down since the highs seen in March due to a barrage of liquidity measures and policy rate reduction by the central bank. For instance, the benchmark yield has come down by over 55 basis points since the highs seen in March. Experts believe that despite many uncertainties, foreign fund flows may still come back to Indian debt.
Ananth Narayan, professor-finance at SPJIMR, says given the relative resilience and the large size of policy response in developed markets, money has left emerging markets this year.
“India’s economy was already weak before Covid-19. The pandemic is still playing out in the country, the lockdown has been very stringent, and the policy response has been muted so far. There is much uncertainty around our growth, fiscal balance, and the health of the financial ecosystem.
“As long as these uncertainties prevail, foreign flows into India could stay muted. However, if a clearer picture emerges, alongside a credible medium term strategy to restore jobs, output and financial stability, foreign investors will come in. There is still much goodwill towards India amongst foreign investors,” Narayan said.
