FPI investments in bonds cross $2 billion in March

Mumbai: Foreign portfolio investors (FPIs) have turned net buyers of Indian bonds so far this year, aided by the central bank’s liberalization of the FPI framework, along with its announcement of a $5-billion foreign exchange swap to boost liquidity. FPIs are net buyers of bonds worth $384.25 million since January. Interestingly, foreign investors have bought bonds to the tune of $2.03 billion in March alone, clocking the biggest monthly buy since October 2017. In the first two months, FIIs were net sellers of $1.65 billion bonds. In 2018, they were net sellers of $6.74 billion bonds.

Analysts said two events led to this optimism—the Reserve Bank of India’s (RBI’s) announcement of letting FPIs use voluntary retention route (VRR) for bond purchases, and the dollar swap. They said along with VRR gaining momentum, there is also reasonable certainty on the political front and the economy in terms of growth and inflation. Nitesh Ranjan, general manager (treasury operations), Union Bank of India, said introduction of VRR to get long-term funds is a trigger for the surge in inflows. “Coupled with this (VRR) is RBI’s announcement of the foreign exchange swap, which will decrease hedging cost for FPIs. Moreover, it is certain that rate hikes in US will not happen, rather a rate cut is possible and, therefore, India becomes attractive,” he said.

Bloomberg data showed FPIs were net sellers of $245.96 million in the first three months of 2018.

Vaswar Mitra, country treasurer (India), Barclays, argued in a Mint column on 6 March that the balanced development of bond markets can be best achieved when regulators design and implement a comprehensive and consistent regulatory framework for FPIs. “Both FPIs and debt issuers will welcome VRR as a structural step towards broadening and deepening onshore bond markets,” said Mitra.

That apart, experts think the recent inversion of the US yield curve could lead to capital coming into emerging markets like India.

Bloomberg reported on 22 March that the treasury yield curve inverted for the first time since the last crisis, the first market signal of an impending recession and rate-cutting cycle. The report said the gap between the three-month and 10-year yields vanished as a surge of buying pushed the latter to a 14-month low of 2.416%. Such inversion is considered a reliable harbinger of recession in the US, within roughly the following 18 months.

“Strong rupee, attractive spread and dovish central banks have paved the way for fresh flows to bonds. Corporate bonds segment is likely to see good traction with VRR window and attractive forex swap”, said Soumyajit Niyogi, associate director, India Ratings and Research Pvt. Ltd.

Analysts said comments by the US Federal Open Market Committee, which signalled no rate hikes in 2019, has opened the doors for Asian central banks to cut interest rates.

“This is likely to significantly ease pressure on (Asian) currencies and allow central banks to embrace aggressive monetary easing. This is particularly the case for (Asian) markets...where domestic inflationary prints are benign and inflationary expectations well-anchored,” said Ajay Bodke, head (investment strategy), Prabhudas Lilladher Pvt. Ltd.