March 4, 2024
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FPIs lap up $8.7 billion govt bonds in 5 months
Overseas ownership of Indian government bonds climbed about $9 billion in just five months since JP Morgan announced its decision to include local sovereign debt in its emerging markets index, illustrating the attractiveness of fixed-income assets in the world’s fastest-expanding major economy for bulge-bracket funds in a constant global hunt for stable currencies and credible investment options.
Foreign portfolio investors (FPIs) have purchased ?71,817 crore – or around $8.7 billion – worth of Indian government bonds since September 22, the day JP Morgan announced the index inclusion, latest data by Clearing Corporation of India Limited (CCIL) showed. To be sure, for the whole of 2023, overall FPI investment in Indian debt – including corporate bonds – was $8.3 billion.
“IGBs (Indian government bonds) have seen more than $8 billion of investments so far, (orders) coming from a diverse spectrum of offshore investors,” said Parul Mittal Sinha, Head – Financial Markets, India, Standard Chartered Bank.
“These range from sovereign wealth funds, global asset managers to bank FPIs that cater to demand from hedge funds through offshore derivative instruments,” Sinha said.
Robust overseas demand for Indian debt will help restrain bond yields, which have an inverse relationship with instrument prices that are expected to climb on higher demand. So far in 2024, yield on the 10-year benchmark bond has declined 9 basis points to 7.08%.
One basis point is a hundredth of a percentage point.
JP Morgan’s announcement, which marked the fruition of decade-long talks between the Indian authorities and global bond index providers, has set in motion investment plans into local sovereign debt by global funds.
Given that actual index inclusion is set to occur only in June, the flows into India are seen accelerating further, especially if the US starts cutting rates by then, bank treasury executives said.
Investors have stepped up purchases of Indian bonds in anticipation of price gains ahead of a likely turn toward easier monetary policy by global central banks and the actual event of index inclusion with requisite weightings.
“One has to take into context the higher interest rates that are prevalent in the mother market – the US. The index comes into play from June 2024,” said Ashhish Vaidya, head of markets, DBS Bank India. “If the US rates remain near 5%, we could see flows worth around $12-15 billion in 2024. But, if the Fed pivots, this could easily go to $20-25 billion.”
