Foreign Inflows Into Indian Debt Hit A 17-Month High

Foreign investors have returned to the Indian debt markets as a turn in global and domestic monetary policy makes domestic bonds more attractive.

Foreign portfolio investments in Indian debt have risen to Rs. 9,005 crore until March 22, 2019, shows data from the National Securities Depository Ltd. Foreign investors pulled out Rs. 7,338 crore from the Indian debt markets in the first two months of the year. At over Rs 9000 crore, foreign investment in debt is at the highest level since October 2017.

The renewed interest in indian debt had added to a strong pick-up in interest in equities. Foreign investments in domestic equity markets are at a 23-month high of Rs. 26,073 crore so far this month.

What’s Driving Debt Flows?

While equity flows have been driven by an expectation that a Bharatiya Janta Party-led government will return to power after the general elections in April-May, debt flows are responding to a turn in monetary policy expectations domestically and globally.

Global bond yields have eased off as central banks across the globe, including the Federal Reserve and the European Central Bank, have turned dovish, said Madhavi Arora, economist at Edelweiss Securities. This means that the attractiveness of high yield economies such as India has increased despite concerns about a large supply of government bonds, Arora said.

Madan Sabnavis, chief economist at Care ratings, shared that view.

The interest rate differential between India and the western economies remains high, Sabnavis said. The surge in inflows, in turn, is strengthening the rupee and improving India’s Balance of Payments fundamentals, he said.

Debt flows could remain strong after the U.S. Federal Reserve signaled a pause in interest rate hikes and also said that its ‘quantitative tightening’ process will come to an end in September.

As a result, interest rates in the U.S. will remain depressed and the dollar may weaken, benefiting emerging economies including India, said Sabnavis.

The monetary policy and liquidity stance in India also remains supportive of debt inflows.

The monetary policy committee will likely cut interest rates by another 25 basis points in April. With both inflation and growth under-performing the RBI’s expectations, “we now expect a 25 basis point rate cut at both April and June’s policy meetings which could result in a cumulative 75 basis points worth of repo rate cuts in 2019,” said Nomura Global Market Research in a report on Friday.

That, together with a pro-active approach to liquidity management, will mean that bonds may see some gains. A large uncertainty to this scenario, however, remains planned gross borrowings of nearly Rs 7 lakh crore by the government in 2019-20. This could keep yields on long tenor bonds elevated even if benchmark policy rates are pared, caution economists and bond market participants.