India witnessed the highest FPI outflow from bonds among Asian peers this year followed by Indonesia that saw an outflow of $7.9 billion.
Even as risk aversion continues among foreign portfolio investors (FPIs) and uncertainty persists around the growth and fiscal slippage numbers of Indian economy, foreign investors continue to dump Indian bonds having sold over $2.6 billion worth of debt in May itself. FPIs have sold over $14 billion worth of Indian bonds on a net basis since the beginning of 2020.
India witnessed the highest FPI outflow from bonds among Asian peers this year followed by Indonesia that saw an outflow of $7.9 billion. Malaysia and Thailand saw an outflow of $3.8 billion each, while South Korea attracted an inflow of $27 billion.
Manish Wadhawan , founder and managing partner at Serenity Macro Partners, said India is staring at a negative shock of 3-5% GDP growth for the year and in this scenario, it’s difficult to believe that FPIs will be allocating money into India. “Till the time we see have some sort of clarity in terms of our fiscal situation and relief in regard to the lockdown situations, do not expect any reversal in flows. India is in the worst spot among the emerging market countries. I think the peak selling by FPIs in debt should be over soon but turnaround may take time,” Wadhawan said.
It is noteworthy that FPI investments in general category central government securities have fallen to the lowest level in over three years at Rs 1.11 lakh crore. At present, general category FPIs have utilised only 47.51% of their available investment limits of Rs 2.34 lakh crore in central government securities. Despite such outflows, bond yields have seen a downward movement this year led by the Reserve Bank of India’s (RBI) policy rate actions and a barrage of liquidity measures. Against a repo rate reduction of 115 basis points since the beginning of 2020, the benchmark yield has fallen by 81 basis points to 5.75%.
Bond market participants are of the view that the yields are under control because there is a rampant expectation that the RBI will soon announce measures to absorb the additional supply of bonds this year. “Any further delay in the announcements by the central bank could lead to an upward movement in the yields,” said a dealer.
Ananth Narayan, professor-finance at SPJIMR, said developed market safe havens have appealed more, with their central banks and governments strongly supporting all asset classes. “We also have to acknowledge that our economic situation does not look good. So far, the liquidity and monetary measures undertaken by the RBI has supported the bond yield, despite larger bond supply from the government, and selling by FPIs. Until there is some clarity on the fiscal slippage and the overall trajectory of the economy, FPIs may stay wary of re-entering Indian markets in a big way,” Narayan said.