FPIs continue to sell g-secs in June amid weak rupee

Synopsis

Foreign investors continued to offload Indian government bonds in June, albeit at a slower pace compared to the previous two months, influenced by the RBI's policy shift and global risk aversion. Despite inflows since June 2024, factors like rising oil prices, geopolitical tensions, and a weakening rupee contributed to the outflows.

Mumbai: Foreign investors continued heavy offloading of Indian government bonds in June, although at a lesser extent than the previous two months, driven by unwinding of long positions following the latest monetary policy announcement, a risk-off sentiment globally as well as a weakening rupee. Foreign portfolio investors (FPIs) net sold ₹4,994 crore of sovereign papers under the fully accessible route (FAR) until June 27, according to Clearing Corporation of India data. They had sold ₹13,360 crore of bonds in April and ₹13,165 crore in May.

Since June 2024, when Indian bonds were included in the JP Morgan Emerging Markets Index, FPIs have invested ₹71,039 crore (about $8.5 billion) in government securities. JP Morgan analysts had projected that over the 10 months of the gradual inclusion of the securities in the index, the local bond market would attract $20-$25 billion in investments.

"There are some outflows seen because oil prices and geopolitical risks were mounting, and with the rupee weakening, exchange rate expectations were going the negative way, which is usually a deterrent for bond inflows," said Dhiraj Nim, economist and forex strategist at the ANZ Banking Group. "Along with this, the shift in policy stance took markets by surprise, making Indian bonds less lucrative."

Agencies

After lowering the policy rate by a quarter percentage point each in February and April, the Reserve Bank of India delivered a larger-than-expected half-a-percentage-point cut in June, bringing the repo rate down to 5.50%. It also shifted its policy stance to "neutral", indicating that future rate cuts would be gradual and data dependent. This move may have damped the appeal of Indian bonds among foreign investors.

Additionally, the unwinding of long positions in Indian sovereign debt through derivative instruments such as total return swaps (TRS) has further pressured the bond market.

"TRS has seen some unwinding after the policy by both short-term investors and long-term institutional investors who are reducing their India weight. FPIs think that the rate cycle is complete and hence there is hardly any room for capital gain," said a senior executive from a large foreign bank. Despite the outflows from Indian bonds, other Asian emerging markets-particularly Indonesia and Malaysia-have witnessed healthy foreign inflows.

"These inflows most likely have to do with the diversification from the dollar theme that's going around; so FPIs are in a hunt for stable economies. However, we would likely have to wait for the risk-off environment to ease before flows return to India," Nim said.

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