Finding RBI stance accommodative, FPIs turn net buyers in G-Secs

After selling sovereign securities worth ₹22,000 crore in the first four months of the current calendar year, foreign portfolio investors in May 2019 turned buyers with a net investment of ₹5,048 crore.

“As FPIs got indication of continuation of softer interest rates in the developed economies and as they became more comfortable with the low bond prices (and hence high yields), they started to pump money in to the debt market in May 2019,” said Deepak Jasani, Head — Retail Research, HDFC Securities.

“FPIs were net buyers of debt papers mainly post the election result from May 27 onwards,” Jasani added. According to data available with depositories, while foreign investors made net sales of bonds worth ₹2,310 crore between May 1 and 24, they made a net investment of ₹3,497 crore in the debt market in the last five trading sessions of the month starting from May 27, the day when the results of the General Election was announced.

“The current optimism in the fixed income market is the result of change in the stance of the RBI policy from neutral to accommodative. Besides, RBI has been injecting liquidity into the inter-bank market due to which the liquidity conditions have been smooth, and in fact, there is also greater faith in the government’s ability to rein in fiscal deficit within the limits pronounced earlier,” Joseph Thomas, Head of Research, Emkay Wealth Management.

The weak corporate earnings and its cascading impact on stocks also weighed on the FPIs’ investment decision during the current month. As against a net investment of ₹1,509 crore in equities, the foreign investors made a net investment of ₹9,579 crore in the debt segment during the current month. However, it is still unclear if the investments in the debt category are into government securities or corporate bonds since the data on sector-wise investment will be available with a time lag.

“Strong rupee, attractive spread and dovish central bank have paved the way for fresh flows into bonds. This could continue till the time either interest rates start to rise abroad or the fiscal situation in India deteriorates resulting in pressure on the rupee,” said Jasani.

Market experts also added that the buying sentiment in the Indian bond market depends on multiple factors such as the direction of oil prices, the fiscal roadmap which will be available from the full-fledged Budget, the progress and area coverage of monsoon, etc. “Pressure on long-end rates may continue to be there on account of the large issues of primary government debt. But the short-end may remain more or less unaffected,” Thomas said.

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