Risk aversion: Bond sell-off brings down FPI utilisation of G-sec limits to 52%

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April 15, 2020 10:10 AM

With a weak currency, potential widening of fiscal deficit and persistent risk-off sentiment among foreign investors, experts say a rebound in inflows may take a long time.

foreign portfolio investors, risk aversion, FPI utilisation of investment limits in G-secs, fiscal deficitFPI holding in many G-secs have fallen below 10% of the outstanding stock in recent times.

With continuous selling in central government securities by foreign portfolio investors (FPIs) due to persistent risk aversion in the wake of the Covid-19 crisis, general category FPI utilisation of investment limits in G-secs have fallen to 52.31% as on April 13 compared to the peaks of over 75% at the beginning of 2020.

In the last 18 consecutive sessions, FPIs have sold Indian bonds – including both G-secs and corporate bonds  – worth $8.8 billion, Bloomberg data show. Following the continuous selling by foreign investors, general category FPI investments in G-secs currently stand at just over $17 billion against the total available investment limits worth over $32 billion, CCIL data show.

Manish Wadhawan, managing partner at Serenity Macro Partners, said that markets are a bit wary of the potential spike in fiscal deficit this year.

“We saw FPI selling in equities halting a bit in recent times but the selling has continued in debt. I believe FPI fund flows will depend a lot on the fiscal and currency views. Even when foreign investors decide to make a comeback to emerging markets, they will have options to invest in the debt of other countries like Korea and China. The only turning point India can see would be if the RBI decides to conduct open market operations (OMOs) or decides to buy bonds directly in the primary central and state government auctions,” Wadhawan said.

Indeed, the rupee depreciated by 6.4% this year and currently stands as the third-worst performer in Asia after the Indonesian rupiah and Thai baht. With a weak currency, potential widening of fiscal deficit and persistent risk-off sentiment among foreign investors, experts say a rebound in inflows may take a long time.

It is also noteworthy that FPI holding in many G-secs have fallen below 10% of the outstanding stock in recent times. For instance, in the beginning of 2020, FPIs held more than 10% of the outstanding stock in eight different G-secs that have maturities in 2022, 2023, 2024 and 2028. However, as on April 13, such holdings of more than 10% of the outstanding stock were seen only in two different G-secs.

Ananth Narayan, professor of finance at SPJIMR, said India entered Covid-19 with a weak economy and with limited fiscal room for manoeuvre.

“The sell-off by FPIs in Indian bonds was part of the global risk-off rout. Many global funds have witnessed draw-downs under these conditions, and emerging market assets have particularly been hit. The steps taken towards index inclusion are very positive but are unlikely to ease the pain in the short-term. We may see the risk-off sentiment for some more time, as the world and India struggle through Covid-19,” Narayan said.

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