Photographer: Anindito Mukherjee/Bloomberg

Debt Outflows In May At The Highest In 17 Months

Foreign investors have remained net sellers of Indian debt in May, offloading the most since December 2016. Foreign portfolio investors have been sellers of Indian debt for four consecutive months due to volatility in global markets and concerns around India’s widening fiscal and current account deficits.

Foreign portfolio investors have sold a net of Rs 18,228 crore so far this month, shows data from the National Securities Depository Ltd. Sales for the year to date now stand at over Rs 29,000 crore.

The last time foreigners were selling such Indian debt so heavily was in November and December, 2016. At the time, the government’s demonetisation decision had rattled investors. Foreign portfolio investors sold more than Rs 21,000 crore in debt in November 2016. Total debt outflows in 2016 had added up to over Rs 43,000 crore.

Vivek Rajpal from Nomura told BloombergQuint that the outflows are in response to a confluence of global and domestic factors. These include a widening fiscal and current account deficit, rising oil prices and expectations of further depreciation in the rupee.

India being a commodity importer, rising crude oil price has widened current account deficit, especially over the past two months. Prior to that, political uncertainties and other country specific factors may have been responsible for the flight of capital. 
Vivek Rajpal, Asia Interest Rates Strategist, Nomura

To be sure, India is not alone in seeing debt outflows. Most emerging markets have seen selling as investors adjust to tighter monetary policy in the U.S. and a stronger dollar.

Historically, capital flows into emerging markets have been mostly closely correlated with the dollar, Jahangir Aziz, chief emerging market economist at JPMorgan told BloombergQuint. What you have seen over the last couple of months is capital flows adjusting to a stronger dollar, he said. Aziz added that in India’s case, the change in the global environment has come alongside macro-economic challenges, leading to steeper outflows.

Foreign investor selling in the debt markets has been a key reason for the weakness in the rupee. The Indian currency has fallen by more than 6 percent so far this year, bringing it within striking distance of its all time intra-day low of 68.86.

The monetary policy committee may need to take capital outflows and the rupee weakness into account while making its next interest rate decision, said Aziz while adding that he would not be surprised if the MPC were to hike rates in June.

Emerging economies like Argentina, Turkey and Indonesia are among those who have chosen to raise rates to defend their currencies.