FPIs are utilising just 37% of their investment limits in government bonds

Radhika Merwin BL Research Bureau | Updated on April 07, 2020 Published on April 07, 2020

In March alone, FPIs have pulled out about ₹60,000 crore from Indian debt market, the largest ever sell-off in a month

Covid-19 has caused turbulence across markets globally, with investors running for cover. Foreign portfolio investors (FPIs), too, have been fleeing from Indian equity and bond markets over the past month. The exit from debt markets has been swift and sharp, with FPIs pulling out a whopping ₹60,376 crore from bond markets in March alone.

This is the largest ever sell-off in a month after the 2013 turmoil, when taper tantrums had rocked the Indian bond markets. In 2013, a mere statement by the US Fed about ending its quantitative easing programme had led to FPIs pulling out ₹33,100 crore in June.

This year, the unprecedented turmoil caused by the virus outbreak across the globe has left Indian bond markets in a tizzy. Foreign investors’ interest in Indian government and corporate bonds had already been tepid in 2019. After the recent mayhem, FPIs are utilising just 37 per cent of their investment limits in government bonds, and about 40 per cent in corporate bonds.

Losing appetite

Going by data put out by Clearing Corporation of India Ltd (CCIL) and National Securities Depository Ltd (NSDL), FPIs’ utilisation of their investment limits in government and corporate bonds has fallen sharply in March.

From about 51 per cent in December 2019, FPIs utilised just 37.5 per cent of their investments limits in government bonds as of March 2020. As of April 3, the investor interest had waned further, with debt utilisation slipping to 37 per cent. The interest is particularly tepid in the ‘long-term FPIs’ category (that include sovereign wealth funds, endowment funds and pension funds). Here the utilisation of investment limits is just 24 per cent.

In any case, FPIs interest in Indian bonds had been lukewarm through most of last year, with the utilisation of investment limits in government bonds at an average 51 per cent and in corporate bonds at about 66 per cent.

In a bid to encourage more foreign flows, the RBI had made some tweaks in the investment limits in January. It increased the FPI limit under the voluntary retention route (VRR) to ₹1.5-lakh crore from ₹75,000 crore. VRR was introduced in March 2019 — a carve-out limit available to FPIs, wherein conventional regulatory norms do not apply. For instance, investments made through VRR are not subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits etc.

But doubling of this limit has not helped draw foreign investors. As of April 7, of the VRR investment limit of ₹90,630 crore, only ₹14,600 crore has been allotted.

This year’s Budget also had some proposals — hike in FPI limit in corporate bonds to 15 per cent (of outstanding) from 9 per cent and to fully open certain specified categories of government securities for non-resident investors. These measures, intended to improve foreign flows into the Indian bond market, have lost significance for now amid the pandemic turmoil.

Massive sell-off

In 2020 so far, FPIs have pulled out ₹72,751 crore (net investments) from Indian bond markets. This is the largest so far after the ₹50,800 crore sell-off in Indian debt in 2013. Since 2006, this the fourth time that FPIs have been net sellers in Indian bond markets. In 2016 and 2018, they had pulled out ₹43,600 crore and ₹47,700 crore, respectively.

Published on April 07, 2020

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