FPIs’ reluctance to sell debt proves India’s haven status

Indian equity might have fallen out of favour with foreign investors over the past few months but the same doesn’t hold true for debt. While foreign portfolio investors hit the panic button on the equity side, they were a lot more reluctant to part with debt instruments (both public and private), even though they remained net sellers of debt in certain months.

Data available with the National Securities Depository (NSDL) show FPIs have been net buyers of both debt and equity starting January 2015. However, in the months when they did turn net sellers, the sell-off was significantly higher in equity than in debt.

For instance, in August, the FPIs sold ₹647 crore debt as against ₹16,877 crore equity. Till September 11, the figure stands at ₹773 crore (net sales) in debt against ₹6,109 crore in equity.

The only exception was May, when net debt sales (₹8,504 crore) exceeded equity sales (₹5,768 crore).

Investment analysts say this may be due to a clutch of bonds maturing in this period, which explains why in June, foreign investors bought net debt of (₹1,737 crore) while continuing to sell equity in large quantities (₹3,344 crore).

Murthy Nagarajan, Head of Fixed Income at Quantum AMC, says this is because foreign investors are still bullish on Indian debt. “Yields are much higher in India compared to what they are globally. In fact, returns are better here even after accounting for currency conversion as interest rate is more or less near zero everywhere else.

“The other reason is that with the rupee, foreign investors are confident that the currency will be more or less stable. Our current account deficit is $25 billion and foreign direct investment is $35 billion; so we have $10 billion in surplus. So, even if FPI flows are negative, the rupee will be reasonably stable. For foreign investors, their returns are dependent on currency stability. If they are sure that the rupee won’t depreciate more than 4-5 per cent, they will invest.”

The yields on government bonds reflect this stability as well. The average 10-year G-Sec yield, according to data with the Clearing Corporation of India, barely moved to 7.81 per cent in July from 7.79 per cent in June. Three- and six-month yields on one-, two-, and five-year instruments have also remained in a narrow range.

Data with NSDL also show that FPIs have filled up 99.64 per cent of their $25 billion investment limit in government bonds through auctions while their corporate debt investment limit stands at 85 per cent.

Lakshmi Iyer, Head of Fixed Income at Kotak Mutual Fund, says the lack of panic on the Indian debt side (as opposed to equity) shows the confidence among foreign investors to play the India rate story.

“FPIs know that if they exit in panic, this is not a market they can re-enter easily. So, the people investing are the long-term guys. Look at the government debt auctions; they get lapped up very quickly and investors are willing to pay 50-75 paisa extra — that’s a huge price — to lock into the Indian yield curve.”

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