Foreign portfolio investors (FPIs), recognising the advantage of early investments, are clearly doubling down on Indian debt market , pouring ₹7,912 crore (nearly $1 billion) in government securities in the first 12 days of this month.

This comes on top of the turnaround seen in 2023, when the total debt inflows by FPIs hit a record six-year high of $7.3 billion. Of this, almost 50 per cent came in November-December 2023, amidst a sharp correction in US yields.

In December 2023, FPI debt inflows stood at record ₹18,302 crore (highest monthly inflows last year), much higher than ₹14,860 crore seen in November 2023, and ₹6,381 crore in October 2023.

This recent surge in FPI interest in Indian debt market painted a stark contrast against the canvas of equity, which saw FPI inflows of ₹3,862 crore in January 1-12, data with depositories showed. 

The FPI equity inflows so far in January 2024 is much lower than the ₹58,372 crore that FPIs pumped in equities through the stock exchanges in December 2023.

The Indian debt market, once a backstage player, was now in the spotlight with its every move scrutinised by those who held the strings of global finance, experts said.

The catalyst for FPI’s financial fervour in Indian debt markets lay in the impending inclusion of India in two prestigious global bond indices. 

The first domino to fall was the anticipated entrance into the JP Morgan EM Index scheduled for June 2024. As whispers of India’s likely inclusion rippled through the global financial community and eventually turned into formal announcement, FPIs have strategically positioned themselves to ride the wave of this monumental shift, say experts.

The narrative took another compelling turn recently with the Bloomberg EM Index setting the stage for India’s entrance in September 2024. Collectively, the inclusion in these two bond indices may bring in $25-28 billion of FPI inflows in six to 12 months from June 2024.

Aditi Gupta, Economist, Bank of Baroda said in a research note that as of end December 2023, FPIs had utilised only 31 per cent of the total limit in the debt market and hence there is sizeable potential for them to invest in this market. 

Apart from the correction in global yields, prospects of India’s inclusion in JP Morgan’s bond index and Bloomberg’s emerging market index have spurred foreign investors interest in the Indian debt markets. This can be gauged from the fact that foreign portfolio investors invest investment in the fully accessible route (FAR) has increased to ₹1.3 lakh crore in 2023, compared to ₹61,260 crore in 2022, she added.

“The trend is likely to persist and gather more pace in the first 2-quarters of 2024. This will be positive for INR, which is likely to trade with an appreciating bias in 2024”, Gupta noted.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said “Since 2024 is expected to witness further declines in U.S. interest rates, FPIs are likely to increase their purchases in 2024 too, particularly in the early months of 2024 in the run up to the General elections. FPI investment in debt is likely to accelerate, going forward.”

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