India’s debt market has been quietly facing a bloodbath this fiscal. From April 2016 till date, foreign investors have pulled out a whopping net ₹32,090 crore — or $4.8 billion — from Indian debt papers.

According to depository NSDL, the net outflows from Indian debt in FY17 is the highest-ever. At the same time, net inflows into equity by foreign investors touched ₹32,488 crore.

In an investment outlook report, portfolio management firm Sanctum Wealth said, “The infusion of fresh deposits in the banking system is likely to shore up demand for G-secs by banks, which augurs well for bond prices. However, the narrowing of the rate differential is likely the keep foreign investor on the sidelines.”

Yields rising

Lakshmi Iyer, Chief Investment Officer (Debt) and Head – Products, Kotak Asset Management, said while foreign investors were pulling out of the domestic market through most of last year, the sell-off aggravated in October-December after demonetisation.

“World-over, yields were rising and correlation (with the local market) had broken. Investors decided to book profits at their year-end.

“If you look at the way the numbers stack up, the last three months of 2016 account for the bulk of the sales,” she added.

From October to December, FPIs sold net debt of ₹46,087 crore.

Another ₹2,319 crore went out in January while February saw net inflows of ₹5,960 crore. The first two weeks of March have also seen positive net inflows of ₹557 crore.

“But I don’t think the February trend indicates a reversal as yet,” Iyer added.

“Barely a tenth of the amount that went out has come back in since January. With the dollar-rupee showing signs of stability and market participants getting comfort that the central bank is not going to cut rates, I think investors are looking more for currency hope and not nearly as much for capital gains.”

Flows to remain tepid

The negative sentiment for foreign investors to Indian debt is expected to remain the same through the rest of 2017, if debt market watchers are to be believed.

Sanctum expects FPI flows to remain tepid in the local debt market in the year ahead. “We expect rates to remain range-bound with a slight downward bias.”

Iyer said even if foreign investors return, “it will still be very measured”.

“With interest rates in the US rising, investors based in the US will see the return of a strong home-country bias. Investors elsewhere will prefer US paper to that of emerging countries.”

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