Muted FPI inflows after JP Morgan bond inclusion not a new phenomenon, say experts

Bonds

Inflows by Foreign Portfolio Investors (FPI) in government securities under the Fully Accessible Route (FAR) moderated after the inclusion of Indian bonds in the JP Morgan Global Bond Index on June 28, but such volatility is not new, experts said.

In the last few months, especially between February and May, investment by the FPIs in FAR securities remained volatile due to global and domestic uncertainties.

According to the Clearing Corporation of India’s (CCIL) data, investment by FPIs in FAR securities in March increased by just Rs 7,097.70 crore, while it reduced by Rs 9,856.78 crore in April, before rising again by Rs 5,458.28 crore in May.

The increase in investment in March and May was sharply lower as compared to the initial months when the inclusion announcement took place. On a monthly basis, the FPI investment in FAR securities rose by around Rs 10,000 crore to Rs 12,000 crore between October and January.

On September 22, 2023, JPMorgan Chase & Co announced it would add Indian government bonds to its JPMorgan Government Bond Index-Emerging Markets.

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US yields rise

“Volatility witnessed between February and May was mainly due to a surge in yields on US Treasuries and delayed rate cut expectations by the US Federal Reserve,” Ajay Manglunia, managing director and head of investment group at JM Financial, said.

Experts attributed the volatility in the investment to the rising yields on US Treasuries. Between February and May, yields on 10-year US Treasury have shot up by around 60-70 basis points.

Expectations of a delayed rate cut by the US Federal Reserve in the current year also impacted the inflows.

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June investments

In June, investment again started picking up after the election results in India. Money market experts said this was due to a boost in investor confidence after the incumbent party formed the government with its allies.

According to Ritesh Bhusari, Deputy Treasury Head at South Indian Bank, a sharp rise in FPI inflows in FAR securities can be attributed to the incumbent government forming the government with their allies, which somewhat boosted the confidence of these investors. “Apart from this, there were some other international and domestic cues, which contributed to this rally.”

JP Morgan has included 29 Indian government securities under FAR in its emerging market index. Currently, India carries a 1 percent weight in the index, with planned incremental increases each month until March 2025.

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