Foreign Portfolio Investors (FPIs) continued to double down on Indian debt markets, pumping in ₹ 16,559 crore in sovereign debt securities in the first fortnight this month even while remaining net sellers on the equity front to the tune of ₹ 3,776 crore, official data showed.

A better than expected fiscal consolidation announced in the latest interim budget on February 1 came in as an icing on the cake to an already bullish tone adopted by the FPIs in the wake of India’s upcoming bond addition in global bond indices from June this year. 

Taken together with their net debt inflows of ₹ 19,837 crore in January 2024, FPIs net investments in Indian debt market so far this year stood at ₹ 36,396 crore, data with depositories showed. However, the FPIs aggregate net selling on equities so far this year stood at ₹ 29,520 crore.

Ahead of India’s inclusion in global bond indices from June 2024, FPIs have been briskly buying sovereign debt since October last year. FPIs had infused ₹18,302 crore in the debt market in December 2023,  ₹14,860 crore in November 2023, and ₹ 6,381 crore in October last year.

While inclusion of Indian bonds in J P Morgan’s Government Market Index-EM is estimated to bring inflows of $ 20-30 billion, inclusion in Bloomberg Emerging Market Local Currency Index could result in inflows of $ 5 billion from passive investors. 

Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers Limited, said “Better than expected fiscal consolidation, remarkable stability of the INR and India’s bond addition in global indices are some of the factors that are responsible for attracting foreign capital in the debt market”.

However, in the equity market, some profit booking has emerged post the stupendous rally and also because the valuation gap with China has further widened, he added.

“We believe China is currently grappling with structural problems; however, in the  near term capital reallocation from India to China cannot be ruled out”, Gohil said. 

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that the sustained FPI buying in debt which started early this year continues and have this month bought debt securities worth ₹ 16,559 crore. “This trend is also likely to continue”, he added.

He noted that the spike in US bond yields triggered by the higher-than-expected consumer price inflation led to sustained selling by FPIs in the Indian equity cash market. “In February through 16th FPIs had sold equity worth ₹ 6112 crores through the exchange. But buying through ‘the primary market and others’ reduces the net sell figure for February through 16th to ₹ 3775 crores”, Vijayakumar said.

The trend of FPI selling in equities is likely to continue so long as the US bond yields remain elevated, he added.

Manoj Purohit, Partner & leader - FS Tax, Tax & Regulatory Services, BDO India, said that Government’s aim in the recent interim budget to keep the fiscal deficit, for the coming financial year, at 5.1 % has provided positive sentiments to the bond players. 

“With no change in capital gain taxation in the interim budget, the yield on bonds plays a significant role for determining the avenues to maximise return on investments”, he said. 

Also, the increased capital expenditure outlay which is almost 3.4 percent of the GDP will attract investors to enhance their allocation in the debt market, Purohit added.