In a turnaround from April’s selling spree, foreign investors are increasing their holdings in debt securities as the J.P. Morgan Index inclusion for Indian government bond approaches.
In May so far, foreign portfolio investment (FPI) in debt securities was Rs. 7427 crore on a net basis, a significant shift from April, when there was net selling of Rs. 11, 218 crore.
“This is because of JP Morgan bond index inclusion. As per the schedule given by JP Morgan, the weightage will be increased by 1 per cent every month. So, passive investors will have to buy to reduce the tracking error of the index,” said Naveen Singh, vice-president of ICICI Securities’ primary dealership.
In September 2023, JP Morgan had announced that it will include government papers, issued by the RBI under the Fully Accessible Route (FAR), in its widely tracked GBI-EM. The inclusion process will start from June 28 and will be phased over a 10-month period, with 1 per cent weight included each month until March 31, 2025. Indian bonds will have 10 per cent weight, similar to China.
“They [FPI] are back in the market also because they see that there are chances of making money as yields are expected to cool off during the financial year,” said the treasury head at a private bank. “They also keep doing the rebalancing of their investments in different markets. The bond inclusion was one of the many reasons for the FPIs to be attracted to the market,” he added.
The yield on the benchmark 10-year government bond fell by 20 basis points in May so far. It settled at 7 per cent on Tuesday.
During the last quarter of FY24, foreign investors infused Rs 54,492 crore in the debt market, which led to the fall in the yield on the benchmark bond by 14 basis points during the period.
The debt market saw a reversal of fortunes in April after a year of consistent robust monthly inflows from FPIs, due to the surge in US Treasury yields amid escalating geo-political tensions in the Middle East. During the financial year FY24, domestic markets witnessed foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365 crore worth of outflow recorded in FY23. Of the total inflows, foreign investors injected Rs. 1.2 trillion into the debt segment, marking the highest influx since the financial year 2014-2015, according to data on the National Securities Depository Limited.
With $250 billion of assets under management tracking the index, the market estimates that $25 billion inflows are expected during the period. As per the index inclusion criteria, eligible instruments are required to have a notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity.
First Published: May 28 2024 | 6:25 PM IST
