Despite the narrowing spread of yields between the benchmark 10-year Indian government bond and the 10-year US Treasury bond, foreign portfolio investors (FPIs) are continuing to invest in the domestic debt market this year, a report by Business Standard stated. It added that the trend is backed by a stable currency and a less volatile bond market.
FPIs have been net buyers in the debt market in 2023 so far, marking the first time in 4 years, since 2019, informed BS, adding that the most recent instance of FPIs being net buyers was recorded in 2019, when they invested ₹25,882 crore in bonds.
As per the report, investors acquired Indian government and corporate bonds amounting to a total of ₹21,831 crore in 2023 until Monday, according to data from the NSDL. With the exception of March, FPIs were net buyers of Indian debt every month this year. FPIs' debt inflow reached its highest in June, standing at ₹9,178 crore, marking the highest monthly inflow in the current calendar year, highlighted the report.
“Many overseas investors perceive that while investment into the country carries the currency risk, the rupee depreciation may not be at a level that returns may turn negative over a period,” Gopal Tripathi, president & head of treasury at Jana Small Finance Bank, was quoted as saying.
The rupee was largely stable in 2023, depreciating 0.12 percent so far, as compared to 2022 when the Indian currency weakened more than 10 percent following the war in Europe and interest rate tightening in advanced economies, noted the report.
Even though FPIs have been net purchasers, they have scarcely utilised the Reserve Bank of India’s established thresholds for government and corporate bonds, the report pointed out. It mentioned that eligible FPIs had only made use of 29.5 percent of the specified ceiling of ₹2.68 lakh crore for central government securities as of Tuesday. Similarly, the utilisation of the upper limit of ₹6.68 lakh crore for corporate bonds was even more minimal, standing at 15.34 percent, BS further said.
Some market participants believe that the inflows might reduce going forward. “Because the currency was stable, the interest gap, which is at a low level, was not being eaten into by the depreciation of the currency. Now that the currency has depreciated, these returns will definitely be eaten into,” Indranil Pan, chief economist at YES Bank, was quoted as saying.
