FPIs pour Rs 68,663 cr in debt instruments in 2023, turn positive after 3 years

The FPI investment in debt in 2023 is also the highest since 2017 when it was about Rs 1.49 lakh crore in positive inflows

Investments by foreign portfolio investors (FPI) in debt instruments turned positive in 2023 after three years due to attractive yields and the upcoming inclusion of Indian bonds in JPMorgan’s index, experts said.

FPI investment in debt stood at Rs 68,663 crore in 2023 compared to Rs 15,911 crore of outflows in 2022, according to data from the National Securities Depository Ltd. The last time debt investments by FPI were positive was in 2019 when inflows stood at Rs 25,882 crore, the data showed.

The FPI investment in debt in 2023 is also the highest since 2017 when it was about Rs 1.49 lakh crore in positive inflows.

“Globally, policy rates will start tapering down, so bond yields in emerging economies will be more attractive to investors. Also, inclusion in the JPMorgan index has been a major driver of FPI inflows in debt,” said Ajay Manglunia, managing director and head of investment group at JM Financial.

Venkatakrishnan Srinivasan, founder of Rockfort Fincap, said key reasons for the positive inflows in debt are the attractive yields on Indian debt instruments as the spread between US treasury and Indian government bond yields widen, improved economic outlook, currency stability, favourable regulatory changes, and improved market sentiment.

On September 22 JP Morgan said that it would include Indian government bonds in its widely tracked emerging market index starting June 28, 2024. The inclusion of India’s sovereign bonds could potentially draw $30 billion of foreign inflows into the country.

Investments by FPIs in debt remained positive in all months of 2023 except March, which experts attributed to year-end outflows. FPIs pulled out Rs 2,505 crore from Indian debt instruments in March 2023.

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Impact on bond yields

The FPI inflows helped yields on 10-year benchmark bonds to remain in the range of 7.15-7.45 percent. At the start of 2023, the yield on Indian bonds, especially the 10-year benchmark, was in the range of 7.00-7.44 percent due to higher inflation and rate increases by the Reserve Bank of India, experts said.

The yields started falling in April after the central bank paused rate hikes due to better economic conditions and a lower inflation trajectory. At that time, the yield on the 10-year benchmark bond fell to below 7 percent from 7.44 percent.

In July, the yields started going up gradually, which experts said was due to expectations of more interest rate hikes by the US Federal Reserve and the RBI’s announcement of Incremental Cash Reserve Ratio (I-CRR) to drain out liquidity, among other factors.

Manglunia said the inclusion in the JPMorgan index may result in demand for sovereign bonds exceeding supply, which may lead to a moderation in yields.

Expected inflows in 2024

Money market dealers expect $25 billion to $27 billion to be invested in Indian bonds after the inclusion of Indian government securities in JPMorgan’s Government Bond Index-Emerging Markets. Based on this, Manglunia expects FPI investment in debt to remain positive in 2024.

Srinivasan said in 2024, this trend could potentially attract more foreign investment to India, provide greater liquidity to its bond market, and contribute to the country's economic growth.

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FPI investment in FAR securities

On December 22, 2023, Moneycontrol reported that FPI investment in Indian government securities through the Fully Accessible Route (FAR) rose 35 percent since JPMorgan said Indian bonds would be included in its index, according to data from the Clearing Corporation of India.

FAR enables non-residents to invest in specified government-backed securities without any ceiling.

According to the data, as of December 20, 2023, FPI investment in FAR securities rose 35 percent since September 22, 2023 and 65 percent since April 3, 2023.