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Foreign portfolio investors (FPIs) reduced their exposure to government securities (G-Secs) during 2020 amid deteriorating fiscal position and falling interest rates.
According to Clearing Corporation of India Ltd (CCIL) data, FPIs’ total investments in G-Secs as on December 31, 2020 stood at ₹98,610 crore, accounting for 42.05 per cent of the total available limit of ₹2.35-lakh crore. In contrast, as on December 31, 2019, they had stood as high as 75.56 per cent of the total limit of ₹2.46-lakh crore.
“The Indian debt market has experienced the highest outflows in over two decades as foreign institutional investors (FII/FPI) have sold sovereign bonds this year (2020) largely on account of uncertain domestic economic outlook, weakening rupee, low interest rates and higher fiscal deficit due to large government borrowing, among major factors,” said Ajay Rangani, Product Head – Debt & Fixed Income at Yes Securities.
“Above-target inflation and higher unemployment are added concerns that led overseas investors to shy away from domestic debt,” he added.
While Indian equities received record FPI flows of ₹1.70-lakh crore in 2020, the debt segment saw a net outflow of ₹1.05-lakh crore. After considering an inflow of ₹25,225 crore under the voluntary retention route, the net FPI outflow from Indian debt in 2020 stood at ₹79,648 crore, which is the highest for any calendar year.
According to sector-wise FPI investment data, of the total outflow from Indian debt securities between January 1 and December 15, 2020, the share of ‘sovereign debt’ alone stood at ₹59,947 crore.
Although FPIs pulled out over ₹60,000 crore each from equities and debt in March 2020, they turned net buyers of Indian equities in the following months while the debt segment witnessed outflows for a large part of last year.
Corporate debt
FPI utilisation of corporate debt also continues to wane. It fell to 26.06 per cent of the total limit of ₹5.42-lakh crore as on December 31, 2020, from 57.89 per cent of the total limit of ₹3.17-lakh crore as on December 31, 2019. For a perspective, FPIs’ utilisation of corporate debt stood as high as 70.44 per cent as on January 31, 2019.
“The weakening of the rupee, negative real yields (10-year G-sec yields at 5.95 per cent and CPI inflation at 6.93 per cent) and excess liquidity in the system created hurdles for credit offtake, thus affecting debt utilisation on the corporate front,” Yes Securities’ Rangani said.
The RBI’s aggressive rate cuts and liquidity measures have further reduced borrowing costs, making it easier to raise money via the banking system, he added.
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