FPI inflows in debt market at nine-year high of ₹1.21 lakh crore in FY24; likely to help soften bond yields

The Foreign Portfolio Investors (FPIs) have infused more than ₹1.21 lakh crore in India’s debt market during the financial year 2023-2024, the highest yearly inflow in more than nine financial years.

As per the data on National Securities Depository Ltd (NSDL), FPIs’ net investment in the country’s debt markets stood at ₹121,059 crore for FY24. This was the highest FPI inflow in the debt market since FY 2014-15, when they infused ₹130,302 crore.

The month of February saw the highest monthly inflow worth ₹22,419 crore in FY24. FPI inflows in the debt market gathered steam in H2FY24 amid the announcements of the inclusion of Indian bonds in various global bond indices.

Read here: JPMorgan to include India in its emerging market debt index, paving the way for billions in inflows

In September 2023, JP Morgan Chase & Co. announced that it would add Indian government bonds to its benchmark Global Bond Index Emerging Markets Index (GBI-EM). It had said that 23 Indian government bonds, with a combined nominal value of $330 billion, were found eligible to be added to the index.

Last month, the Bloomberg Index Services said it will also include 34 Indian government bonds eligible for investment via the country's fully accessible route (FAR) in its Emerging Market Local Currency Index from January 31 next year.

Read here: Bloomberg to add Indian bonds to EM debt indexes from January 2025

In the most recent development, Abrdn Plc also announced to increase its investment in Indian sovereign bonds due to their appealing yields.

The inclusion of bonds in these indices is expected to bring an investment of roughly $20 billion to $30 billion. However, this investment will begin only by June 2024, and, therefore, FPIs are doing some front running given this potential investment, analysts said.

“FPI debt flows have gathered momentum since November 2023 because of sentiment buying post announcement of India’s inclusion to JP Morgan Global Bond Index. Further India’s buoyant growth story coupled with fiscal prudence, leveraged sentiments of foreign investors at a time when still some degree of uncertainty prevailed over the outlook of the global economy,” said Bank of Baroda Economist Dipanwita Mazumdar in a note.

She expects volatility in the dollar index and US treasury yield to also act as a catalyst for more flows into the Indian debt market. 

Also Read: Index inclusion a game changer for Indian fixed-income markets: Vishal Goenka of IndiaBonds.com

The considerable frontloading by FPIs supported India’s 10-year government bond yield in FY24. Additionally, the country’s buoyant growth condition coupled with fiscal prudence and RBI’s effective liquidity management operations have remained positive for yields. 

“Going forward, we expect India’s 10-year yield to have a further downward bias. We do not rule out the possibility of yields reaching below 6.95% from H2 onwards when favourable growth-inflation dynamics would prompt a rate reduction by RBI. It is possible that in June 2024, when the US Federal Reserve rate cut cycle kicks in, some softening bias will prevail for India’s domestic yield,” said Mazumdar.

Support will come from FPI flows. If the RBI does lower the repo rate based on inflation and monsoon conditions possibly from August onwards, it would be of the order of 25-50 bps. This can lower the 10-year yield to 6.75%, she added.

Meanwhile, FPIs bought Indian equities worth ₹208,212 during the previous fiscal year. Overall, the total FPI flows into Indian capital markets for FY24 was at ₹3.39 lakh crore, including equities, debt, debt VRR and hybrid investments.

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