MUMBAI: Net investments by foreign portfolio investors in the debt market surged to $14.58 billion in FY 2024, making it the highest net inflow in the past six years as investors turned bullish following announcements to include government securities in global indices.
Over 70% of the inflows have come in the last five months following JP Morgan Chase’s announcement in September to add Indian government bonds to its benchmark Global Bond Index Emerging Markets Index.
“Debt market witnessed strong inflows from debt FPIs as investors were buying bonds ahead of index inclusion last quarter.
“We expect momentum to continue in this quarter as investors continue adding prior to index inclusion,” Piyush Agarwal, senior managing director, head — corporate and institutional banking (India), Mizuho Bank told FE.
“Post index inclusion, we will see stable flows as weightage of securities in the index will increase in staggered manner during this financial year,” he added.
Out of the total $14.58 billion FPI investments, $10.6 billion inflows came in the last five months of the previous fiscal, according to National Securities Depository data.
In September 2023, JP Morgan Chase & Co announced that it would add Indian government bonds to its benchmark Global Bond Index Emerging Markets Index (GBI-EM).
Last month, the Bloomberg Index Services said it will also include 34 Indian government bonds eligible for investment via the country’s fully accessible route (FAR) in its Emerging Market Local Currency Index from January 31 next year.
The domestic bond market is likely to see an additional inflow of as much as $30 billion after the inclusion of government securities in a major global index starts in June, according to Standard Chartered.
Increase in foreign inflows due to the inclusion of government securities in global indices, fiscal consolidation and cooling of US treasury yields have helped easing of bond yields. The yield on the benchmark 10-year G-sec closed at 7.06% on March 28 from 7.31% on March 31 last year, reflecting a fall of 25bps.
Experts expect bond yields to ease in the current financial year. “10-year yield got support in FY24 from considerable frontloading by FPIs.
“India’s buoyant growth condition coupled with fiscal prudence and RBI’s effective liquidity management operations; all have remained positive for yields,” said Dipanwita Mazumdar Economist, Bank of Baroda.
“We do not rule out the possibility of yields reaching below 6.95% from H2 (second half) onwards when favourable growth-inflation dynamics would prompt a rate reduction by RBI,” she added.
If the RBI lowers the repo rate based on inflation and monsoon conditions possibly from August onwards, it would be of the order of 25-50 bps which can lower the 10-year yield to 6.75%, she added.
The fall in bond prices also mean lower borrowing costs for the government, as well as for corporates as other bonds in India are priced relative to the benchmark government bond.
Source: The Financial Express