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FPIs may increase debt investments till first half of 2023, says Resurgent India's Jyoti Gadia

The investment bank MD expects core inflation to remain above 6 percent primarily due to supply-side constraints and rising input costs

December 16, 2022 / 04:12 PM IST

After being negative for most of this year, foreign portfolio investment (FPI) in debt is likely to turn positive and increase till the first half of 2023 aided by rising interest rates, Jyoti Prakash Gadia, Managing Director at Resurgent India, an investment bank and a Securities and Exchange Board of India (SEBI) registered Category-I Merchant Bank, told Moneycontrol.

According to NSDL data, FPI investment in debt in this calendar year remained negative, except in January, August and September. So far in this month, FPI investment in debt is negative Rs 1,886 crore. The flows were positive in the first two weeks but turned negative this week. On December 14, there were Rs 3,897.02 crore outflows from debt.

"The FPIs will move towards a balanced portfolio in order to tackle the apparent volatility and uncertainties," Gadia added.

FPIs withdrew a net of Rs 16,124 crore from the Indian debt market from January 1, 2022, to December 15, 2022, higher than the net Rs 10,359 crore outflows in the whole of calendar 2021.

Despite the heavy FPI outflows this week, yields on the government securities, especially the 10-year benchmark 7.26 percent-2032 bond, eased marginally. This was because the headline inflation fell to an 11-month low of 5.88 percent in November from 6.77 percent in October due to a fall in food prices and a higher base effect.

Also read: CPI inflation slumps to 11-month low of 5.88% in November

Bond yields to remain range bound

The yield on government securities remained in the range of 7.21-7.26 percent so far this month.

Gadia expects the 10-year benchmark government bond yields to remain range-bound at around 7.35 percent by December-end. Further, the movement of yield in 2023 will majorly depend upon the size of the borrowing.

The Budget in 2023 will be the last one before the 2024 Lok Sabha elections and hence the government is expected to borrow a sizeable amount to spend on infrastructure projects.

Considering this, the yields will go up but volatility may be kept under control if borrowings are spread in a phased manner over the year, he added.

The consumer price index (CPI) in November has come below the Monetary Policy Committee's (MPC) target upper band of 6 percent for the first time this year.

Core inflation, as stated by the Reserve Bank of India (RBI) Governor Shaktikanta Das, remained sticky and elevated at over 6 percent.

Slower  pace of rate hike

On the core inflation front, Gadia said it is likely to remain above the benchmark of 6 percent, primarily due to supply-side constraints and rising input costs arising out of continued global uncertainties and the geopolitical situation.

Also read: Core inflation may average 6.2-6.3% in FY23 despite CPI fall in November, say experts
He said the central bank is likely to increase the repo rate in February but at a slower pace, say by 25 basis points, which can take the repo rate to 6.50 percent.

"The RBI is expected to keep a close watch on inflation numbers, and further decisions will depend on the emerging data for December, the stance of the US Fed and the overall manufacturing growth rate," Gadia said.

Last week, the MPC hiked the key repo rate by 35 basis points to 6.25 percent to fight inflation. The RBI has increased the repo rate, or the policy lending rate, by 225 bps since May.

Manish M. Suvarna
Manish M. Suvarna is Senior Correspondent at Moneycontrol. He writes on the Indian money markets.