FPI debt inflows at 26-month high in Nov on Fed rate pause

MUMBAI : FPI net inflows into Indian bonds in November have hit the highest level in 26 months, thanks to higher allocations by foreign investors to emerging markets like India in anticipation of US interest rates having peaked and buying by non-index funds ahead of the country’s inclusion in JP Morgan’s Global Bond Index – Emerging Markets next year. Analysts expect the flows to remain strong, though volatile.

FPIs have in the month through 24 November invested a net 12,399 crore in Indian debt, the highest quantum since September 2021, when they pumped in 12,804 crore. Net inflows in November account for almost 28% of total 44,438 crore invested so far this fiscal, the highest in six years.

Their investments are primarily into central government and corporate bonds, shows NSDL data. Indeed, the depository data shows that utilisation limits by general category of foreign investors has increased to 24.22% or 64,895 crore of the upper limit as of 24 November from 23.1% or 61,880 crore as of 31 October.

In the case of corporate bonds also they have increased their buying a tad to 15.43% or 1.03 trillion as of 24 November from 15.29% or 1.02 trillion on 31 October.

The increased buying coincides with the US Fed leaving its benchmark Fed Funds Rate unchanged at 5.25% on 1 November for a second straight policy meeting and data this month which shows that retail inflation in US cooled off to 3.24% in October from 3.7% a month ago and was below the historic average of 3.28%.

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Rising tide

Economists and market experts view the easing of US inflation as a lagged effect of 11 consecutive rate hikes by the Fed from March last year to July 2023.

They believe that moderating retail inflation would pre-empt the Fed from tightening rates further and that this would result in bond yields in US falling and more allocations to EMs like India.

“Higher inflows by FPIs into Indian debt are being driven by moderating bond yields in the US with inflation easing toward the Fed’s 2% target,” said Madan Sabnavis, chief economist, Bank of Baroda.

Sabnavis believes that FPI flows into Indian debt markets would continue to stay positive but that there could be volatility on the upside. For e.g., one month might see flows jump and the next might see lesser inflows .

“While there would be volatility on the upside, we might not witness any FPI outflows from Indian debt,” added Sabnavis.

Indeed, the benchmark US 10-year bond yield has fallen by 0.4% in the past one month to 4.47%. This is also significantly below the 16-year high of 5% hit last month.

The yield on the Indian 10-year paper has cooled off by a higher 1.5% to 7.27% over the same period, attracting investments from foreigners as bond prices and yields move in opposite direction.

UR Bhat, founder of Alphaniti Fintech, said apart from US markets pricing in a more dovish Fed stance on rates, buying of Indian paper was being fuelled by demand from non-index funds ahead of India’s inclusion into the GBI-EM.

“Passive trackers like bond funds and debt ETFs will buy Indian paper coinciding with its inclusion in JP Morgan bond index in June next year. But, non-index funds could have begun picking up Indian government paper in advance to make a killing from an anticipated fall in yields when the country is actually included in the bond index,” Bhat said.

The inclusion in the GBI -EM index could fetch an estimated foreign investment of $23 billion into Indian government bonds . As corporate paper is benchmarked to sovereign bonds , cost of raising funds for top rated Indian corporates could also reduce.

Sabnavis said that inclusion into GBI-EM had raised buzz of India being included on the watchlist of Bloomberg Barclays Indices apart from FTSE Russell’s Emerging Markets Global Bond Index.

At the end of October top 10 countries with the highest exposure to Indian debt included Singapore at 48,461 crore, followed by the US ( 30,447 crore), Luxembourg ( 23,827 crore) and Canada ( 21,438 crore) .

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Updated: 27 Nov 2023, 10:04 PM IST

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