FPIs sell record sum in government bonds this quarter since global index inclusion

Bonds

Outflows by foreign portfolio investors (FPIs) from government securities is highest so far in this quarter since the inclusion of Indian bonds in global bond indexes, likely due to narrow interest rate differential between India and US 10-year bonds, said experts, currently around 180 basis points (bps).

According to the Clearing Corporation of India’s (CCIL) data, foreign investors pulled Rs 25,543.68 crore in the current quarter between April 2 and June 3 from Indian bonds under the Fully Accessible Route (FAR), which turned out be first outflow reported in any quarter since the inclusion announcement of government bonds in global bond indexes.

FAR enables non-residents to invest in specified Government of India dated securities without any investment ceilings.

After the first inclusion announcement in September 2023, every quarter have seen an increase in holding of Indian government securities.

On September 22, 2023, JPMorgan Chase & Co announced it would add the Indian government bonds to its JPMorgan Government Bond Index-Emerging Markets. After this, Bloomberg and FTSE Russel also announced inclusion of Indian bonds in their emerging market index.

Since the announcement, Indian bonds in global indexes have been seeing sharp inflows, but soon after the rate cut cycle begun earlier this year, the differential between India and US narrowed, leading to these investors moving away from India to home country.

Usually, when the spread between two government bonds - or the gap between the yields in the bonds issued by both countries - narrows, foreign investors pull back their funds from emerging economies and park it in less risker destinations. This is because when the differential is lower, foreign investors end up earning lower returns as it gets adjusted with the currency exchange rate and other expenses related to compliance.

Experts believe the outflows can be seen further due to expectation of more rate cuts by the Reserve Bank of India (RBI) leading to a further fall in yields and narrowing of differential between yields of both countries.

Moneycontrol’s poll of economists and fund manager suggest that the central bank may cut the repo rate by 25 bps at the upcoming review on June 6. The MPC of the RBI will convene on June 4 and deliver the outcome on June 6.