Foreign Portfolio Investors (FPIs) net investments in the debt market have hit a seven-year high so far this fiscal (till March 22) to touch ₹1.20 lakh crore. This was higher than the earlier record net inflows of ₹1.19 lakh crore seen in fiscal 2017-18, the latest data with depositories showed. 

In the ongoing March month, FPIs have pumped in a net investment of ₹13,223 crore in the debt market. They had invested ₹22,419 crore in February and ₹19,836 crore in January 2024 in the debt market. So far this calendar year, FPIs have invested ₹55,479 crore in the debt market. 

Nitin Raheja, Executive Director, Julius Baer India, said that FPI debt investments have been extremely robust this fiscal due to attractive yields on Indian sovereign debt relative to the US treasury. This has been supported by strong macros in the form of the robust growth outlook for the Indian economy, stable inflation and a stable currency and the stated objective of the government to improve its fiscal deficit, he said. 

“The upcoming inclusion of Indian bonds in JP Morgan’s index has led to an inflow in advance into the Indian debt markets. Further, the expected global tapering in policy rates should make bond yields in emerging economies look even more attractive to investors making this trend of inflows into Indian debt more sustainable”, Raheja said. 

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that FPI inflows into debt are likely to continue, going forward. However, a sharp surge in debt flows is unlikely since the US bond yields have also risen in recent days. If the differential between developed market bond yields, particularly US bonds and Indian bond yields decline, the debt inflows will moderate.

Rising trend

An interesting feature of the foreign portfolio investment in India this fiscal is the steady growth in debt investment in sharp contrast to the volatile equity investment, he noted. 

This rising trend in debt investment is evident in March, too,  with inflows of ₹13,223 crores in debt through March 22.

The fundamental reason for this sustained FPI flows into debt is the inclusion of Indian bonds in the JP Morgan EM Bond Fund and Bloomberg Bond Index which is expected to bring investment of around $25 billion, according to Vijayakumar. 

This investment will begin only by June 2024 and, therefore, FPIs are doing some front running given this potential investment, he added. 

A recent note by Swiss headquartered UBS, a Global financial services major, said that the inclusion of India’s government bonds in the JP Morgan Global Bond Index in June 2024 and in the Bloomberg index in January 2025 has fueled optimism among foreign investors. This is seen in the surge in FPI flows ($ 4.8 billion Year to date) into Indian debt markets, according to UBS.

The 10-year US bond yields have surged by 33 basis points year to date on risks of a delay to the rate cutting cycle and a still hot labour market. 

Indian bond yields, in contrast, have seen a diverging trend, with the 10-year government bond yield falling 11 basis points year to date to 7.06 per cent amid ongoing optimism about Indian government bond inclusion in the global bond index. This has also been further boosted by lower-than-expected net borrowing targets in the FY2025 interim financial budget.

FPIs interest in equities rebound 

Building on their conviction in Indian equity markets’ growth potential, FPIs have displayed significant buying interest in equities during March, injecting a net investment of ₹38,098 crore into this asset class in March 1-22, data with depositories showed.

The investment came on the back of a modest net investment of ₹1,539 crore in February 2024 and a huge outflow of ₹25,743 crore in January. 

However, FPIs have resorted to selling to the tune of about ₹7,200 crore this past week even as they remained net buyers in March. 

The increased FPI inflows into equities this month coincide with the backdrop of a robust Q3 GDP growth rate of 8.4 per cent, which exceeded expectations and was announced on February 29. 

So far this calendar year, FPIs have invested 13,893crore in equities. In fiscal 2023-24, FPIs have made net equity investments of ₹2.11 lakh crore, which is a three-year high.

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