India Bonds Continue To See FII Selling Despite Index Inclusion Next Month

Since the announcement of index inclusion last September, domestic government securities have been heavily bought up, leading foreign investors to become net sellers of Indian gilts in April. Last month alone saw a sale of Rs 10,949 crore, the highest since December 2021. In May so far, FPIs have sold securities worth Rs 1,602 crore.

The scheduled inclusion of Indian gilts in JPMorgan's Government Bond Index-Emerging Markets this June, alongside inclusion in Bloomberg's Emerging Market Local Currency Indices, is anticipated to bring in $40–50 billion in inflows.

The outflows in the bond market have mirrored a selloff in the equity segment, contributing to market nervousness and causing the volatility gauge to spike to its highest level in over a year.

Despite a reduced pace of inflows this year, the upward trend remains intact, with year-to-date inflows amounting to Rs 43,307 crore. January recorded inflows of Rs 19,837 crore, while February saw the highest monthly inflow in over seven years at Rs 22,419 crore.

Since the announcement of Indian government bonds in the JPMorgan Emerging-Market Index in September last year, the debt market has witnessed an inflow of Rs 83,789 crore.

Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, noted that elections often breed uncertainty, prompting investors to adopt a wait-and-see approach until the political landscape stabilizes. He further pointed out that increased US Treasury yields can divert capital flows away from emerging markets like India.

In another interesting trend, selling in government securities is mostly in short-duration bonds rather than longer gilts, according to Mataprasad Pandey, Vice President at ARETE Capital Service Pvt Ltd.

Security 7.37 GS 2028, which had the highest FPI concentration at 21% as of March 20, 2024, has come down below 9%.

"During rate reversal, undoubtedly they will benefit more with their high-duration bonds as compared to low-duration bonds. Hence, it makes sense to increase the allocation of higher-duration bonds," Pandey said.

Despite the short-term selloffs, long-term trends will likely hinge on broader economic and political developments both domestically and globally, Srinivasan noted.

“Once election uncertainty subsides and if economic fundamentals remain robust, FPIs might gradually return by June, potentially reversing the current selloff trend.”

The trend may depend on multiple factors, including election outcomes, global economic conditions, and RBI policies, he said.

Meanwhile, the yield on the 10-year benchmark bond opened flat at 7.12% on Monday.