Elevated Yield Drives Foreign Inflows Into Indian Debt To Six-Year High
Many FPIs expect the spread between Indian government bonds and U.S. Treasury yields to widen once the Fed starts its reversal.
While foreign portfolio investors sold Indian stocks for two straight months, overseas inflows into domestic debt spiked to a six-year high on higher rates.
So far this year, foreign investors have net invested Rs 37,485 crore, the highest since 2017, in the Indian debt market, according to the data from National Securities Depository Ltd. While inflows stood at Rs 7,544 crore from January to May, the investments spiked to Rs 29,941 crore in the following months.
Rising investments into Indian debt coincide with higher rates as the benchmark 10-year government bond yield is at 7.31%, having rebounded from the sharp dip in May to 6.9%. While U.S. rates, too, are rising, according to Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP, many FPIs expect the spread between Indian government bonds and U.S. Treasury yields to widen once the Fed starts its reversal.
The high-yield coupon and the attractive structure of the debt instruments are drawing FPIs, Srinivasan said. And foreign investors prefer India among emerging markets to diversify, he said.
Debt inflows contrast with equity selloff as global volatility has been heightened by fears of escalation in the Middle East. Overseas institutional investors offloaded Rs 24,548 crore worth of Indian stocks in October and sold Rs 14,768 crore in September.
Private Credit To Grow
Potential foreign inflows into Indian debt will expand the source of foreign capital, strengthening India’s balance of payment situation and deepen the market for the Indian rupee, Quantum Mutual Fund said in a note. That would also enhance the credibility of the Indian bond market, making it easier for the government and corporates sector to raise debt capital from global investors.
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.
Srinivasan sees FPIs participation in high-yield corporate bond issuances rising in the coming months. With the current tightness in banking liquidity, many corporates prefer to enter the private credit market, he said.
Overseas investors, he said, may prefer to move their funds from equity to debt for sometime till stocks markets stabilise.
