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Business News/ Markets / Stock Markets/  FPIs' February inflows swell to 22,419 crore in debt markets; What's attracting them to Indian bonds?

FPIs' February inflows swell to ₹22,419 crore in debt markets; What's attracting them to Indian bonds?

  • The benchmark indexes Nifty 50 and BSE Sensex, which were little changed in January amid foreign outflows, gained more than one per cent last month on FPI buying and robust domestic inflows.

FPI inflows in debt markets stood at 22, 419 crore last month. Photo: iStock

Foreign portfolio investors (FPIs) bought 22,419 crore in Indian debt markets last month, extending the positive momentum picked up in 2023. The benchmark indexes Nifty 50 and BSE Sensex, which were little changed in January amid foreign outflows, gained more than one per cent last month on FPI buying and robust domestic inflows.

FPI inflows are likely to increase further due to India's rising share in the MSCI Emerging Markets index, global brokerage firm CLSA said in a note. India narrowed the gap with China in MSCI's Global Standard index, which tracks emerging market stocks for investors, after the latest revision.

Also Read: FPIs turn net buyers in February, infuse 1,539 crore in Indian equities; Will inflows sustain in March?

‘’FPIs are steadily increasing their buying in debt market. They have bought debt to the tune of 22,419 crore in February on top of the 19,836 crore which they bought in January. This trend of steady debt investment is likely to continue,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Index provider MSCI raised India's weightage to an all-time high of 18.2 per cent, which came into effect at the end of February. India could witness up to $1.2 billion of passive foreign flows after the MSCI February review, Nuvama Alternative and Quantitative Research said in a note.

"It is crucial to acknowledge the strong macroeconomic, corporate fundamentals and macro stability that underpin India's equity markets and their valuations," said Mike Shiao, chief investment officer, Asia ex-Japan at Invesco.

Among individual sectors, auto and pharma stocks saw buying interest, while foreign selling continued in financials. FPIs have offloaded financial services shares worth about 40,000 crore in the first two months of 2024, triggering a five per cent drop in the financials index over the same period.

In January, FPIs injected a notable 19,800 crore into Indian bonds, marking the highest monthly inflow in six years, surpassing the inflows of 18,302 crore observed in December 2023. This positive momentum extended the ten-month streak of inflows in the debt market since April 2023, with the last recorded net outflow occurring in March 2023, amounting to 2,505 crore.

What's attracting FPIs to Indian debt markets?

1.Inclusion of bonds in JP Morgan indexAccording to market experts, the trigger event has definitely been the announcement to include Indian government bonds in the JP Morgan GBI-EM Global Diversified Index (and other related indices) from June 28, 2024, with a weight of 10 per cent, staggered over 10 months.

According to analysts, this inclusion will raise FPI ownership in Indian GSecs to around 3.5 per cent–four per cent by FY2025, up from 1.6–1.7 per cent currently. In value terms, this move is expected to bring approximately US$30 billion in inflows in the same period.

India has been on Index Watch Positive since 2021 for inclusion into the GBI-EM following the Indian government’s introduction of the fully accessible route (FAR) program in 2020 and substantive market reforms for aiding foreign portfolio investments. FAR bonds are securities that have no restrictions for foreign investors and are eligible for global index inclusion.

2.Inclusion to Bloomberg EM debt IndexIn addition to JP Morgan, Bloomberg Index Services said on Tuesday it would include in its EM Local Currency Index from January 31 next year 34 Indian government bonds eligible for investment via the country's FAR.

"The inclusion of these bonds will be phased in over a 10-month period starting on the rebalance date of January 31, 2025," it said in a statement. "The weight of India FAR bonds will be increased in increments of 10 per cent of their full market value every month over the 10-month period ending in October 2025."

3. US Bond YieldsMarket experts say that normally when the US 10-year yield rises above 4.15 per cent, the FPIs sell heavily. US bond yields increased to around 4.16 per cent in January from approximately 3.88 per cent in December 2023, leading to capital outflows from equity towards higher-yielding US bonds.

"For February FPIs have turned buyers in equity for 1,539 crore. This is despite the US bond yields ruling high with the 10-year yield at around 4.25 per cent. FPIs may again turn sellers in some of the coming days. But they are unlikely to sell aggressively because their selling is not having any impact on the market which is setting new record highs,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Looking ahead, he emphasised that FPI inflows into the equity market will hinge on trends in US bond yields and global as well as Indian equity market conditions. With recent corrections in US bond yields, significant FPI selling in February is unlikely. There may even be a shift towards buying, while inflows into the debt market are expected to persist, according to Dr Vijayakumar.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.

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ABOUT THE AUTHOR

Nikita Prasad

Nikita covers business news and has been producing news on digital platforms since 2018. She writes on economy, policy, markets, commodities, industry. Her core areas of interests include infrastructure, energy, oil and gas, railways, and transport/mobility. She has worked for business news channels like Moneycontrol, NDTV Profit, and Financial Express in the past. If you have story ideas/pitches/reports or quotes/views to share, reach her at nikita.prasad@htdigital.in.
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