Investment by foreign portfolio investors (FPI) in debt turned net negative in October after remaining positive for two consecutive months.
"Negative FPI flows in debt can be attributed to rate hikes by the US Federal Reserve (the Fed), which is making US bond yields attractive relative to emerging markets yields, including Indian yields," said Manish Jeloka, Co-Head of Products & Solutions, Sanctum Wealth.
According to NSDL (National Securities Depository Limited) data, October saw net debt outflows worth Rs 3,532 crore, compared to Rs 4,012 crore worth of net inflows in the previous month. With a net inflow of Rs 3,845 crore, FPI investment was positive in August as well.
Since the start of this fiscal, August and September were the only months when FPIs have been net buyers .
Bond yields stable
The yield on the government bonds, especially the 10-year benchmark bond, remained range-bound in October, trading in the range of 7.40-7.50 percent levels.
The FPI outflows have not impacted bond yields much in October as they have not been very large. Moreover, though the inflation stood at 7.41 percent in September, above the Reserve Bank of India’s (RBI) comfort level of 6 percent, it is expected to peak and start on a downward trajectory from Q3FY2023, Jeloka added.
"There is domestic demand at 7.50 percent yield levels. Long players have money in their wallet, and 7.50 percent is a relatively attractive yield. Besides, considering that we have already seen a 150 basis point (bps) up-move, the scope for a further up-move is limited, so it is a good risk-reward ratio," said Ritesh Bhusari, DGM, Treasury, South Indian Bank.
Even though long-term bond yields have remained stable, the yield on shorter-term papers has risen sharply since the RBI started raising interest rates to tame inflation.
The central bank has so far raised policy rates by 190 bps since May, but India’s retail inflation has continued to remain above the targeted 2-6 percent for three consecutive quarters.
Presently, rates on short-term papers such as commercial papers and certificates of deposit (CD) are almost at 10-year government bond levels. The spread on a 1-year CD and a 10-year bond, which was close to 225 bps, has now narrowed to 25 bps with tightness in the system following the repo rate hikes.
Outlook
So long as the Fed continues with its rate hike trajectory, money market dealers expect FPI inflows to remain negative.
"FPIs may not return in a hurry. The US yield is more attractive. Unless that cools, flows may not return," Bhusari added.
So far this month, FPI investment is negative to the tune of Rs 2,860 crore as on November 9, per NSDL data.
Dealers also said that it is unlikely to have any major impact on yields as domestic inflows should compensate for the FPI outflows. However, stickier-than-expected inflation or overshooting the fiscal deficit target for FY2023 could lead to higher bond yields.
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