FPI investments into Indian debt nudge $22-billion mark

As far as central government securities are concerned, FPIs have utilised 99.96% of the permitted quota of Rs 1.89 lakh crore. (Image: Reuters)

Foreign portfolio investors (FPI) continue to remain upbeat on Indian debt as fund flows into the segment have nudged the $22 billion mark, according to data from depositories. FPI investments into Indian debt has hit $21.9 billion on a year-to-date basis against the $887 million outflow seen during the same period last year. FPIs have already utilised 99.38% of the permitted quota of Rs 2.17 lakh crore in the corporate debt segment. As far as central government securities are concerned, FPIs have utilised 99.96% of the permitted quota of Rs 1.89 lakh crore. The interest remains focussed on the corporate debt than the central government securities. Since the beginning of October, FPIs have pumped in almost $2.86 billion into corporate bonds on a net basis.

Experts believe a strong Rupee, relatively higher returns and a positive macroeconomic outlook has kept the fund flows intact. India’s real interest rates are relatively very high compared on a global scale and the yield on the country’s debt instruments are relatively attractive. Added to this is the fact that the currency has remained stable—the Rupee has given a return of 4.47% on a year-to-date basis.

The only segment which has seen a lack of FPI interest is the state development loans (SDLs). According to market experts, foreign investors have kept away from SDLs because of a lack of transparency in their finances and due to liquidity concerns. This is evident from the utilisation levels—FPIs have used just 14.15% of the permitted quota of Rs 30,000 crore.

The Reserve Bank of India stated in its October monetary policy that it will disclose high frequency data relating to finances of state governments—available with it— on its website. The RBI also spaced apart the SDL auctions and has indicated consolidation of state government debt to improve liquidity in SDLs.

The regulator said its guidelines will constitute the initial steps in overall reforms to be unveiled over the next 12 months which will help reduce the currently inadequate reflection of risk asymmetries across states in the SDL market. One noteworthy aspect is that there is a lack of considerable difference between the yields on SDLs of states with good financial performance and the states which have not shown fiscal prudence.

According to bond dealers, the primary reason for this pricing anomaly is the investor comfort that the central bank services the borrowing. Till the servicing mechanism changes, dealers indicate the spreads between yields of different SDLs is unlikely to change drastically. Going forward, it will be interesting to watch the reaction of foreign investors to the state finances data that is expected to be released by the central bank soon.

Bond dealers say if the data provides a good picture of the finances and if consolidation in the state debt improves the liquidity in SDLs, fund flows might be directed to this segment as well.