Foreign portfolio investors (FPI) have pulled out over Rs 4,000 crore in just a week from Indian bonds that are part of global bond indexes, as the spread between Indian and US bond yields narrowed to over 20-year lows.
According to the Clearing Corporation of India’s (CCIL) data, FPI investment in Indian bonds under Fully Accessible Route (FAR) stood at Rs 2.89 lakh crore as on May 23, lower than Rs 2.94 lakh crore as on May 16. FAR enables non-residents to invest in specified Government of India dated securities without any investment ceilings.
Experts have cautioned in advance over outflows in the bond market after the spread between US and Indian treasury bonds fell to a historic low.
On May 22, Moneycontrol reported that spread between Indian and US bonds maturing in 10 years fell to its lowest in over two decades at 164 basis points (bps), after the yield on the latter rose sharply owing to fiscal deficit concerns and Moody’s rating action.
According to Bloomberg data, spread is lowest since July 28, 2004, when it was at 135 bps.
The rise in yields on US treasury comes after the progress of Trump’s spending and tax bill in Congress, which is expected to widen America’s federal deficit. The soaring US bond yield was a result of poor response to the $16 billion auction of 20-year US Treasury Bills, which were sold at a higher coupon rate than previously anticipated.
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.
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