Record FPI inflows in debt market mark over 6-year high in December

Foreign portfolio investors’ (FPIs’) net investments in the domestic debt market surged in December, marking a 77-month high, that is, since July 2017.

According to market participants, this significant uptick in FPI inflows can be attributed to the post-domestic policy outcome and the US Federal Reserve’s dovish stance at the December policy.

FPI inflows into debt stood at Rs 18,393 crore in December against Rs 14,106 crore in November, according to data on the National Securities Depository Limited.

Market participants expect a surge in early-stage capital inflows within the debt segment from FPIs during the first quarter of the calendar year 2024.

This comes ahead of the inclusion of Indian bonds in the JP Morgan index starting June 2024.

Gaura Sengupta, economist at IDFC First Bank: “The index inclusion starts from June-end next financial year.

"The pickup has already started from the last couple of months.”

“We should see more of that in Q4. These are active funds, which are front loading and are basically running ahead of the index inclusion.

"It is because they would like to enter when the yields are still higher,” Sengupta further said.

JP Morgan had announced the inclusion of India in its widely followed emerging market bond index on September 22.

"India will be included in its flagship index GBI-EM Global Diversified index — a process that will start from June next year.

The inclusion will be phased over a 10-month period, with 1 per cent weight included in each month, till March 31, 2025.

Indian bonds will have 10 per cent weight, like China.

The surge in inflows during December can also be attributed to a growing consensus among investors that the worst economic challenges are behind us. This comes with signs of inflation cooling off and a perceived absence of any imminent interest rate hikes, said market participants.

The accommodative stance of the Reserve Bank of India (RBI) and the dovish position of the Federal Reserve further contribute to the optimism, creating a horizon for potential profits.

The Fed had hinted at three potential interest rate cuts during 2024 in its last meeting.

Back home, the monetary policy review was interpreted by the market as dovish as compared to the previous two policies.

The domestic rate-setting panel decided to keep the policy repo rate unchanged at 6.5 per cent for the fifth straight review meeting and the withdrawal of accommodation stance while stopping short of clearly communicating that the rate cycle had peaked.

This shift in sentiment has provided a directional certainty, said market participants.

Investors are capitalising on the opportunity to lock in yields, anticipating that the upcoming quarter of the next financial year holds potential for profitable returns.

The expectation of stable dollar-rupee rates, coupled with the anticipation of positive returns from yields, is driving confidence among investors.

“India is also gaining attractiveness, particularly from a dollar-rupee perspective, as the stability of the exchange rate encourages investors, even in an un-hedged manner.

The prospects of buying at the current yield and foreseeing a rally of 10-15 basis points by March-end adds to the allure, making the bond market more euphoric,” said the treasury head at a private bank.

Foreign investors pumped in Rs 68,004 crore into the Indian debt market in the current calendar year.

It is the highest amount in the past six years. In 2022, there was a net FPI outflow of Rs 5,706 crore.

FPIs emerged net purchasers of Indian debt in 2023 for the first time in four years.

The most recent instance of FPIs being net buyers was in 2019, when they invested Rs 25,882 crore in bonds.

With the exception of March, FPIs displayed consistent net buying of Indian debt every month of this year.