Foreign Investors Sell Over Rs 1 Lakh Crore In Indian Debt In 2020
A man holds a briefcase covered in U.S. dollar notes during “Occupy LSE” protests , close to the headquarters of the London Stock Exchange Group Plc, outside St Paul’s Cathedral in London, U.K. (Photographer: Simon Dawson/Bloomberg)

Foreign Investors Sell Over Rs 1 Lakh Crore In Indian Debt In 2020

Foreign investors remained net sellers of Indian debt for the fifth consecutive month in July, even though global and local markets calmed considerably. While the extent of selling has reduced, investors remain unconvinced of the attractiveness of Indian debt with fiscal uncertainty persisting.

So far in July, foreign investors have sold debt worth Rs 1,343 crore, adding to the tally of outflows seen this year. Overall, foreign investors have sold Rs 1.08 lakh crore across the debt markets between January and July.

Foreign portfolio investors remained net sellers of debt for five straight months starting March, making this the longest streak of outflows since June 2018, when flows were negative during February-June 2018. However, cumulative net outflows between January and July 2018 were much lower at Rs 41,392 crore from January and July this year. The outflows this year are also more than those seen at the time of the taper tantrum in 2013.

In 2020, the exodus was led by steep outflows of Rs 60,376 crore in March alone, the highest recorded outflows since at least 2010.

Uncertainty around an underperforming rupee makes for an expensive entry fee, said Aurodeep Nandi, India economist at Nomura.

There is also the Damocles sword hanging over the market on how the government will finance its large borrowing programme, and the extent to which the central bank will choreograph its absorption. Add to this the uneven pace of economic recovery in the backdrop of rising cases and the sticky inflation trajectory, and it makes for a sobering assessment.
Aurodeep Nandi, India Economist, Nomura

Though the Indian rupee has largely remained stable, foreign investors may not see room for significant appreciation, said Madhavi Arora, economist at Edelweiss. Though robust external parameters, like the country’s current account balance, augur well for the rupee, fiscal and growth concerns may remain a drag, she said.

Radhika Rao, economist at DBS Bank, also said investors are wary as the Covid-19 infection curve is yet to stabilise. This points to an uncertain fiscal outlook even as a pause in interest rate cuts is possible due to the stickiness in inflation.

With the cumulative bond supply likely to rise to a record high, clarity on the demand dynamics, including the likelihood of the central bank’s participation, might help allay part of the concern, she said.

Rao said demand from local players has offset cautious foreign inflows into the debt markets so far.

Debt Inflows By Voluntary Retention Route

Apart from selling in the general category, the voluntary retention route aimed at longer term flows, also saw exits.

After six months of net inflows, the VRR category saw outflows of Rs 1,240 crore in July 2020, according to data by NSDL. VRR debt inflows amounted to Rs 14,890 crore during January-July 2020, on a cumulative basis.

With select companies investing in their Indian units via this route, the outflows could be the result of a strategy call, Arora said.

In January, the RBI had reopened a window of foreign investment in local debt via the voluntary retention route, providing investors easier rules in return for a commitment to remain invested for a longer period. The central bank had also raised the limit for investments via this route from Rs 54,606 crore earlier to Rs 1.5 lakh crore.

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