Monthly Foreign Inflows Into Domestic Debt Market At Six-Year High

Foreign portfolio investment in the domestic debt market hit a six-year high in November, driven by robust yields and the domestic bonds' inclusion in JPMorgan's Emerging Market Global Bond Index.

Foreign portfolio investors have infused Rs 14,556 crore as of Nov. 29, according to data from the National Securities Depository Ltd. The previous highest monthly inflow by FPIs was recorded in October 2017.

The high-yield coupon and the attractive structure of the debt instruments are drawing FPIs, according to Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

The U.S. 10-year Treasury yields came down sharply to 4.30% as compared with the Indian government's 10-year Treasury yield, which is still trading around 7.25%, Srinivasan said. "FPIs will be keen to watch this development and we can expect some investment flow from FPIs in Indian government bonds."

So far this year, foreign investors have net invested Rs 50,057 crore in the Indian debt market.

The yields between sovereign and corporate bonds will widen a bit which will encourage a lot of overseas investors, apart from the domestic ones, Ajay Manglunia, managing director and head of the investment-grade group at JM Financial Products Ltd., told BQ Prime in an interview.

Investors from the FPI route will probably look at the securities which are in the tenure of three to five years or may be the benchmark 10-year bond, Manglunia said.

India’s inclusion in JPMorgan’s GBI-EM Index could attract around $25-50 billion (passive and active) foreign inflows. And India’s chances of inclusion into the Bloomberg Global Aggregate Index have also risen.

"We expect the momentum to continue slowly in the coming months too as foreign investors are getting attracted to corporate high-yield issuances combined with attractive structure," Srinivasan said.

Indian investors looking for better returns and diversifying from equities are lapping up high-yielding but riskier corporate bonds as demand for domestic debt rises.