Foreign Investment In Government Debt At Less Than Half The Permitted Limit

Foreign investors have remained sellers of Indian debt since March and now hold less than half the permitted limit for investment in central government debt. This, in a year when the Indian government is hoping to draw in a fresh pool of money by targeting a listing on global bond indices.

Foreign investors hold Rs 1.1 lakh crore in central government debt under the general category, according to data from the Clearing Corporation of India Ltd. This is 47.68 percent of the permitted limit. The level of utilisation has fallen as foreign investors have remained net sellers for March, April and May. The overall limit for general category investments in central government securities stands at Rs 2.34 lakh crore.

In the long-term category of investors, only 26 percent of the limit has been utilised, the data showed.

FPIs have been net sellers in four of the five months this year, selling a total of Rs 1.03 lakh crore. Selling pressure peaked in March with foreign investors pulling out more than Rs 60,376 crore. In April and May, foreign investors have sold a net of Rs 12,552 crore and Rs 20,290 crore, respectively.

While there have been some inflows under the Reserve Bank of India’s voluntary retention scheme, they remain small. So far in 2020, foreign investors have put in Rs 12,754 crore through this route, which offers operational relief to those who are willing to stay invested for a minimum of three years.

Among other categories, 38 percent of the corporate debt limit has been utilised, while less than 2 percent of the state bond investment limit is taken up.

Uncertainty Across EMs

Radhika Rao, economist at DBS Bank, said foreign investors remain jittery about the state of government finances in emerging economies.

“The primary concern for debt investors has been uncertainty over the fiscal outlook as most governments have undertaken substantial support measures, and stand ready to do more if recovery underwhelms,” said Rao. “With consequent impact on the scale of borrowings, visibility is sought on the demand quotient. Rating action risk has also been a watch factor.”

India isn’t alone in seeing outflows.

Indonesia, an economy often compared to India and one which has a far more open debt market, has seen close to $9 billion in outflows this year. With foreign investors accounting for a third of outstanding debt in Indonesia, authorities have stepped in regularly to stabilise bond markets. The Indonesian central bank recently got legal backing to participate in the primary government bonds markets.

In India, the central bank has intervened sporadically in the secondary markets but has stayed away from primary market purchases to help support the government’s revised Rs 12 lakh crore borrowing plan.

Foreign investors, however, still remain tentative.

“FPI selling in India debt is definitely part of global selling as investors get concerned about two things (1) widening of fiscal deficits and (2) QE done by central banks. That said, more recently, we are starting to see investor interest coming back in local currency bonds of many countries. However, data shows that interest in India bonds has been lukewarm at best,” said Rohit Garg, currency and rates strategist at Bank of America Merrill Lynch.

India-Specific Concerns

Nagraj Kulkarni, Asia rates strategist at Standard Chartered Bank, said while the initial bout of selling in Indian debt was synchronised with a broader selloff across emerging markets, selling has turned more India-specific. This is “specifically due to concerns around widening fiscal deficit”, he said.

“In addition, nominal bond yields in India are relatively lower than some of its EM peers. So Indian debt is still not the most attractive among EMs,” said Kulkarni. While lower rates in developed markets will eventually push global investors towards emerging market debt, this will take some time, he added.

Garg agreed that Indian bonds are not seen as the most attractive in the emerging market category. “On a relative terms, countries like Indonesia offer much higher real rates and the central bank there is keen to see currency appreciation. As a result, India doesn’t come up on the radar,” he said.

On March 30, the RBI announced details of a new “fully accessible route” for foreign portfolio investors.

Under the route, the central bank has allowed full foreign investment in five-year, 10-year and 30-year bonds issued from financial year 2020-21 onward. The move is intended to help India gain entry into the global debt indices and draw in a new pool of capital.

Also Read: Indian Debt Market Braces For A Wave Of Public Sector Borrowings

“The near-term impact of FAR is limited because inflows into EMs are yet to pick-up. Over the medium term FAR will be positive in attracting FPI inflows,” Kulkarni said.

Garg added that India will likely witness increased flows if it secures a global bond index listing. “It will be extremely important for India to keep its forex relatively stable so that on a total return basis, it becomes an attractive proposition for Investors. Something that China has been able to exhibit,” he said.