Foreign portfolio investors (FPIs) have been dumping Indian stocks since the mid of last fiscal. However, the equity market is not the only one facing the onslaught of foreign fund outflow. The FPIs have not been bonding well with the Indian debt market as well.
As per latest depositories data, the foreign investors have utilised only 23 per cent of their investment limit in central government securities (G-secs). As of June 15, 2022, the FPI investment in G-Secs (under both general and long-term categories) was ₹89,297 crore against an upper limit of ₹3,90,188 crore.
For a perspective, FPI utilisation in G-secs was as high as 60 per cent as of March 2019, which then came down to 53.95 per cent at the end March 2020, to further decline to 33.71 per cent at the end of FY21. As of March 2022, FPIs investment in G-Secs stood at ₹98,953 crore, accounting for 26.35 per cent of the total investment limit of ₹3,75,596 crore.
Why the waning interest
Experts attribute the quantitative tightening by the US Fed Reserve and other major central banks, rising inflation, widening current account deficit (CAD) and weakening rupee as reasons for waning interest in Indian debt.
A sharp rise in the yield of risk-free US government bonds is one of the reasons making Indian government bonds less attractive vis-a-vis the dollar-backed assets. For instance, the 10-year US treasury was trading with a yield of 3.48 per cent on Thursday, the highest since April 2020 (on monthly closing), nearly 200 bps higher since the beginning of the current calendar year.
“As rates go up outside, FPIs do migrate back when it comes to fresh investments. Rate increase is not a good sign for those who trade regularly on debt. Hence, those who buy and hold for short tenures, feel that the US market is better,” said Madan Sabnavis, Chief Economist, Bank of Baroda
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said it was mainly due to two factors. “Firstly — the depreciating rupee (FPIs have been reducing their exposure to countries with rising CAD like India) and secondly, rising yields in the US.”
FPIs investments in corporate bonds were not exciting either.
As of June 15, 2022, FPIs have utilised only 17.88 per cent of the total investment limit of ₹6,37,455 crore. In contrast, their utilisation in corporate debt stood as high as 75.90 per cent at the end of March 2019.
Sabnavis said corporate bonds were never attractive to FPIs due to thin exit options in the secondary market. Geojit’s Vijayakumar attributed the low investment in corporate bonds to reduced issuances as corporation were already deleveraging their balance sheet.
Outflow larger than inflow
The FPIs have been predominantly net sellers of Indian debt in the last five fiscals. Foreign investors have pulled out ₹50,443 crore from Indian debt in FY21 followed by a modest inflow of ₹1,628 crore. In the current fiscal, FPIs have pulled out ₹12,543 crore as of June 16.
However, FPIs have been net investors in debt under the voluntary retention route (VRR). In March 2019, the Reserve Bank of India introduced VRR to attract FPI inflows into Indian debt under a separate channel. Investment under this route is locked for three years. However, these investments are free of the macro-prudential and other regulatory prescriptions.
June 17, 2022