FPIs pull over $1B from Indian debt securities in June
What's the story
Foreign portfolio investors (FPIs) withdrew over $1.06 billion from Indian debt securities in June, following a massive outflow of $3.03 billion in April. The trend has been attributed to global uncertainties such as tariff hikes and economic slowdown, along with domestic factors like falling interest rates that narrow the return gap between Indian and US bonds.
Market trends
Outflows aligned with regional trend
Radhika Rao, a senior economist at DBS Bank, observed that the June outflows were mainly in the Fully Accessible Route (FAR) segment. This is in line with a broader regional trend. Investors are also waiting for more favorable entry levels as the yield spread between Indian government bonds and US Treasuries narrows.
Investment shifts
Foreign investors hopeful for improved liquidity
Despite the outflows from Indian debt, particularly government securities that form part of global bond indexes, foreign investors have turned their attention toward short-term bonds. They are hopeful for improved liquidity after the Reserve Bank of India (RBI)'s proposed CRR cut from September. This move is expected to infuse ₹2.5 lakh crore into the banking system.
Yield curve adjustment
Domestic yield curve shifted higher
The domestic yield curve shifted higher after the RBI decided to frontload rate cuts, adopt a neutral stance, and set a high bar for further easing. Calming remarks from the RBI Governor later stabilized bond prices. Some experts have noted that the India-US 10-year bond yield spread has been below 200 basis points for some time now, reducing the carry advantage.
Investor caution
Recent volatility, sharp INR movements make investors cautious
Though oil prices have stabilized, recent volatility and sharp Indian rupee (INR) movements have made investors cautious. Venkatakrishnan Srinivasan, the founder and managing partner at Rockfort Fincap, said heightened currency risk has made Indian assets less attractive. Even with the RBI's dovish pivot, FIIs remain cautious in a risk-off environment, prioritizing safety over limited yield pick-up.
Future expectations
Experts expect flows into emerging market duration assets to resume
Despite the current trend, experts believe that the improving domestic macroeconomic backdrop and the government's commitment to fiscal consolidation create a conducive environment for bonds. They expect flows into emerging market duration assets to resume as US yields more accurately reflect softer economic data and dollar weakness. This could potentially reverse the trend of FPIs pulling out from Indian debt securities.