Foreign portfolio investors (FPI) have infused ₹11,366 crore in the Indian debt market so far in August, pushing the net inflow tally in the debt segment to more than the ₹1 lakh-crore mark.
According to data from National Securities Depository Limited (NSDL), FPIs have poured a substantial ₹1,02,354 crore in the Indian debt market in 2024 so far. In August alone, FPIs invested ₹11,366 crore so far, following net investments of ₹22,363 crore in July, ₹14,955 crore in June and ₹8,760 crore in May.
Meanwhile, FPIs have pulled out ₹16,305 crore from Indian equities this month so far on the back of unwinding of the yen carry trade, recession fears in the US and ongoing geopolitical conflicts in the Middle East. FPI inflows into the equity segment in 2024 so far stands at ₹19,261 crore.
Overseas investors’ strong buying interest in the Indian debt market can be attributed to India's inclusion in JP Morgan’s Emerging Market government bond indices in June this year.
Analysts said that FPIs have been front-loading their investments in Indian debt markets in anticipation of the inclusion in global bond indices ever since the announcement of India's inclusion came in October 2023 year. FPI inflows have continued to remain robust even after the inclusion.
“The trend of FIIs buying stocks through the ‘primary market and others’ category and selling through the exchange continued last week, too. There were bulk deals also executed through the exchange. The logic behind this divergent trend of selling through the exchange and buying through the primary market is the difference in valuations i.e, lower valuations in the primary market and high valuations in the secondary market,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services, BDO India believes amidst a global slowdown, geo-political crisis in the middle east and neighbouring countries, India still stands at a sweet spot compelling the foreign fraternity to take a bet for a long term investment horizon.
“Given the seamless trading volumes in the capital markets, post Budget 2024 announcements, FPIs have kept the momentum upwards, keeping India on the hotspot in both equity and debt segment. The regulator is also contemplating tweaking the existing regulations to permit certain FPIs to invest more than the existing cap of 10% in equity by harmonising the FDI and FPI route,” Purohit said.
The international bond markets were buoyed by the FOMC minutes and the US Federal Reserve Chairman Jerome Powell’s remarks at Jackson Hole Symposium which have set the stage for monetary easing in the US.
US Bond markets are currently pricing in 100 bps of US Fed rate cuts over the course of the remainder of FY25.
“The US Fed is all set to start cutting policy rates from September onwards and in the backdrop of global monetary easing, Indian bonds remain attractive on the back of strong and stable underlying macroeconomic factors and favourable demand supply dynamics at play. The scope for rate cuts in India is on account of high real positive rates and the need to encourage private investment and there is a fair probability of rate cuts beginning from CY25 onwards,” said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.
Bond yields tend to move in advance of rate action and investors can look to increase allocation to Fixed Income at every uptick in yields, Pal added. He expects long bond yields to continue to drift lower over the next couple of quarters and expects the benchmark 10 year bond yield to go towards 6.50% by Q4 of FY25.
“Investors with medium to long term investment horizons can look at Dynamic Bond Funds having duration of 6-7 years with predominant sovereign holdings as they offer a better risk- reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are attractive in the 1 year segment of the curve also,” Pal suggested.
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