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Foreign portfolio investors (FPIs) have turned away from Indian corporate bonds in a big way in FY21. Amid risk aversion towards NBFC debt instruments and in search for benchmarked fixed income products, FPIs utilisation in Indian corporate debts more than halved to 23.14 per cent in March 2021, from 54.49 per cent for the same period last year.
“The cost of hedging INR in the forward market is quite formidable. Quite a few FPIs hedge their currency risk when they buy India bonds as they seek carry via fixed income. Also, US Treasury yields have been rising gradually which offers FPIs dollar exposure without need to hedge. Hence, we have seen general disinterest in buying India bonds,” said Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.
Highest outflow
FY21 witnessed the highest ever outflow of FPI investments from Indian debts in a financial year at ₹50,443 crore. Of the total outflow, over 73 per cent or ₹36,952 crore went from corporate bonds while the remaining outflow was from sovereign debts.
“An analysis of FPIs’ investment activities in FY21 shows that bank FPIs and asset managers contributed bulk of the outflows. It has been observed that an increasing number of FPIs are becoming benchmark centric. Since Indian bonds are still not part of widely used fixed income benchmarks, it may partly explain their rotation out of Indian bonds,” said Dhawal Dalal, CIO-Fixed Income, Edelweiss AML.
Within corporate bonds, FPIs pulled out ₹11,391 crore from the financial services sector ( including banks, FIs, NBFCs and HFCs) while the collective outflows from all other sectors amounted to ₹25,561 crore.
But it’s not just FPIs. Even domestic mutual funds have sharply reduced their exposure in corporate bonds during the previous fiscal.
Mutual fund exposure in corporate debt (including floating rate bonds, NCDs and others) of NBFCs fell to ₹90,516 crore in February 2021 from ₹94,443 crore as of March 2020. Their exposure in ‘others’ corporate bonds fell even sharply to ₹2.77-lakh crore from ₹2.98-lakh crore during the same period.\
MF exposure
“In the post-pandemic world, NBFC balance sheets and profitability have come under pressure due to sharp fall in business and drop in refinancing opportunities,” Edelweiss’ Dalal said, adding, “RBI’s moratorium to borrowers led to depletion in their cash reserves while servicing of their debt obligations remained in force. All these developments triggered a number of credit downgrades within the BFSI space. This may have contributed to mutual funds reducing their exposure to NBFC in FY21, in our opinion.”
He also added that mutual funds are anyway reducing their exposure gradually from unlisted space since the aftermath of IL&FS issue.
“A series of credit events in BFSI space post IL&FS raised investor concerns towards corporate governance, opacity in balance sheets, skewed business models, over-reliance on short-term borrowing to fund long-term projects etc. All these developments caused consternation among mutual funds and their investors and contributed to gradual decline in MF exposure in the NBFC sector in FY21,” he added.
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