FPIS pull out of debt after a year of strong inflows

Selling pressure may continue until India’s inclusion in JPM index in June

The debt market saw a reversal of fortunes in April after a year of consistent robust monthly inflows from foreign portfolio investors (FPI). Market participants anticipate that the selling pressure will persist, with the expectation that the bond market will regain its stability following the Jpmorgan bond index inclusion in June.

“There might be selling for some time by the active investors who had come in,” said Vikas Goel, managing director and chief executive officer, PNB Gilts.

“It is temporary…there will be some outflow but it will be marginal. There is no trigger now to be buying, and that is why I think there is some amount of selling,” he added.

In April so far, foreign investors have pulled out a net of ~3,592 crore from the debt market due to the surge in US Treasury yields and escalating geopolitical tensions in West Asia.

On Tuesday, FPIS sold ~3,363 crore worth of bonds in a single day. In the current week, they have sold around ~2,669 crore worth of government bonds.

FPIS’ investment in government bonds fell by around 5.5 per cent in the past month. They sold ~6,530 crore worth of five-year bonds, which is the most liquid bond among fully accessible route (FAR) securities.

“I think in April and May, foreign inflow will be subdued,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “But, they might come back stronger post-election,” he added.

In September 2023, Jpmorgan included India in its flagship index GBI-EM Global Diversified index. India will join the index with 1 per cent in June. The weight will increase by 1 per cent each month until 10 per cent in April 2025. Subsequently, on March 5 of the current year, Bloomberg Index Services revealed that Indian government bonds would be added to its Emerging Market Local Currency Government Index starting January 31, 2025.

In 2023-24 (FY24), domestic markets witnessed foreign inflows of ~3.23 trillion, a notable turnaround from the ~45,365 crore worth of outflow recorded in 202223. Of the total inflows, foreign investors injected ~1.2 trillion into the debt segment, marking the highest influx since 2014-15, according to data on the National Securities Depository.

During the last quarter of FY24, foreign investors infused ~54,492 crore in the debt market, which led to a fall in the yield on the benchmark bond by 14 basis points during the period. The yields also slumped because the US Federal Reserve Committee hinted toward three rate cuts in 2024. Following the inflows through index inclusion, the eagerly awaited event for the financial year was rate cuts by the Federal Reserve. However, higher-than-expected inflation data from the US indicated that interest rates will remain higher for longer.

The anticipated timing for the earliest rate cut has been pushed back due to the increase in US Treasury yields, deferring the previous expectation of a cut in June. Some market segments now project the earliest rate cut to occur in December 2024. Additionally, the forecast of three rate cuts for the year has been revised down to two.