FPI investment in Indian debt instruments turns positive in 2023
In 2023, foreign portfolio investors (FPIs) poured Rs. 68,663 crore into Indian debt instruments, a significant turnaround after three years of outflows. Experts believe this shift is because of attractive yields and the upcoming inclusion of Indian bonds in JP Morgan's index. Ajay Manglunia, Managing Director of Investment Group at JM Financial, explained, "Globally, policy rates will start tapering down, so bond yields in emerging economies will be more attractive to investors."
Factors contributing to positive inflows
Venkatakrishnan Srinivasan, the Founder of Rockfort Fincap, identified several factors for the positive inflows in debt. They included appealing yields on Indian debt instruments, currency stability, an improved economic outlook, favorable regulatory changes, and better market sentiment. The gap between the US treasury and Indian government bond yields has widened, making Indian debt more enticing. To note, JP Morgan announced on September 22 last year, that it would add Indian government bonds to its emerging market index starting June 28.
Impact on bond yields and FPI inflows
The FPI inflows helped maintain yields on 10-year benchmark bonds within the 7.15-7.45% range. Yields began to drop in April after RBI halted rate hikes due to improved economic conditions as well as lower inflation trajectory. However, yields started to climb again in July because of anticipated interest rate increases by the US Federal Reserve and the RBI's Incremental Cash Reserve Ratio (I-CRR) announcement to drain out liquidity. Manglunia believes JP Morgan index inclusion may lead to moderation in yield.
Expected inflows and impact on Indian bonds in 2024
Money market dealers predict that $25-27 billion will be invested in Indian bonds, once Indian government securities are included in JP Morgan's Government Bond Index-Emerging Markets. Manglunia expects FPI investment in debt to remain positive in 2024. Srinivasan added that this trend could potentially draw more foreign investment to India, and offer higher liquidity to its bond market, ultimately contributing to the nation's economic growth.
