Foreign Inflows Into Indian Debt Tops Rs 1 Lakh Crore, Equity Lags On Valuation Concerns

Overseas investors were more attracted to Indian sovereign debt papers than to the equity, given the valuation premium and muted first-quarter earnings.

Net inflows into the debt market topped Rs 1 lakh crore on Friday and currently stand at Rs 1,00,100 crore, according to the data from the National Securities Depository Ltd., updated till the previous trading day. This is the highest yearly inflow into domestic bonds since 2017.

The flows are buoyed by the domestic gilt inclusion in JPMorgan Chase & Co.'s benchmark emerging-market index. The chain reaction for other inclusions has already begun; as Bloomberg said, it will include the India Fully Accessible Route bonds in its Emerging Market Local Currency Government Index and related indices. This will be done in a phased manner over 10 months from Jan. 31, 2025.

This year, the inflows into the debt market have pushed the yield on various tenure bonds lower as demand for safe assets continues to climb.

This month, global funds have been on a selling spree in equities, having already sold stocks worth nearly Rs 29,000 crore. During the same period, domestic investors have pumped over Rs 34,000 crore to keep the markets afloat.

This trend is likely to continue since India is the most expensive market in the world now, and it is rational for FPIs to sell here and move the money to cheaper markets, VK Vijayakumar, chief investment strategist at Geojit Financial Services, said. "This picture doesn’t change even if the market turns more bullish on fears regarding the US recession receding."

The selling of local equities comes at a time when analysts have recommended exercising caution amid slowing earnings, weaker demand, and'record-hhigh valuations'.

Citi Research now sees limited upside for the Nifty 50 and has pegged its Nifty target for the month of September at 25,000 as opposed to its target of 24,400. Nuvama believes that margins for Indian companies will bump into more headwinds than tailwinds going forward.

The FPI outflows witnessed in August were primarily driven by a combination of global and domestic factors, according to Vipul Bhowar, director of Listed Investments at Waterfield Advisors. "Globally, concerns about the unwinding of the Yen carry trade, potential global recession, slowing economic growth, and ongoing geopolitical conflicts led to market volatility and risk aversion."

Despite these factors, FPI flows into India should persist given the strong economic performance and other macro indicators, he said.

India has been the top investment destination for foreign investors this quarter in the Asia-Pacific region, with an inflow of $1.16 billion. Chinese stocks have seen the most selling and may see its first yearly outflow from equities in 2024, according to Bloomberg. 

But, despite these inflows, the rupee continues to depreciate to record levels on significant outflows from the equities front. The domestic currency fell to a record low of Rs 83.99 last week but strengthened to trade at Rs 83.89 against the US dollar.