Foreign portfolio investors’ (FPI) bets in Indian government securities under the Fully Accessible Route (FAR) dropped by a sharp ₹17,054.21 crore in the last three months due to hardening of bond yields globally and rising currency risks.
Foreign investors pulled back ₹5,615.21 crore in October, ₹10,592.89 crore in September and ₹846.11 crore in August, according to the data compiled by PTI from the Clearing Corporation of India (CCIL). Before this, foreign investors were net buyers of Indian government securities.
The total investments by foreign investors in FAR G-secs stood at ₹3.57 lakh crore as of Tuesday, CCIL data showed.
“The reversal in FPI flows into FAR-eligible government securities, with outflows in September and October following strong inflows during May to July, reflects changing global yield dynamics and rising currency risks,” said V Ramachandra Reddy, head of treasury at Karur Vysya Bank.
Money market experts said the dynamics of global government bond yields have changed following the West Asia crisis, as rising inflationary risks and the possibility of further interest rate hikes have made foreign investors increasingly risk-averse in recent months.
They added that the surge in international Brent crude oil prices amid the crisis has heightened inflationary concerns, raising the prospect of tighter monetary policy and influencing global bond market movements.
Typically, when bond yields rise in their home markets, foreign investors tend to withdraw funds from emerging markets and redirect them towards their domestic markets, where higher returns can be earned without exposure to emerging-market currency risks. This can make emerging-market assets relatively less attractive, particularly when currency depreciation risks and uncertainty over returns increase.
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Between July and October, the 10-year US Treasury benchmark’s yield fluctuated between 4.75% and a high of 5.29%. Similarly, the yield on India’s 10-year benchmark government bond rose from 6.83% to 7.30% during the same period.
During this period, the Indian rupee also depreciated against the US dollar, adding to the risks for foreign investors. However, the currency’s decline was subsequently checked following measures announced by the Reserve Bank of India (RBI).
Rupee faced increasing external headwinds in recent months due to higher crude oil prices, rising global bond yields, and continued outflows from the Indian market.
Bank of Baroda in its report said that the Indian rupee depreciated sharply at the start of October to hover around a lifetime low. To arrest the steep fall in the currency, the RBI announced measures aimed at supporting the rupee in the spot market (by announcing a separate dollar window for OMCs) and also curbing speculative trading activity. As a result of these measures, the rupee made a smart recovery, rising by over 2% after the announcement was made.
However, the uncertain global environment reversed the recovery of the local currency.
“The difference between the yields on GSec and US Treasuries has to be maintained at a certain level which varies from 200-250 bps. This has also been the historical trend. Given that the rupee tends to depreciate by 2-4% historically, the absence of such a minimal difference will be a disincentive for foreign investors,” Bank of Baroda said in a report.
“Hardening US Treasury yields have increased the relative attractiveness of dollar assets, while narrowing yield differentials have reduced India’s relative appeal. Yield differential attracts foreign capital, but currency stability sustains it,” Reddy added.
Experts added that the FPI flows in the Indian bond market may remain volatile in the coming days and may track the movement in the US Treasury yields, volatility in the Indian currency and Brent crude oil prices.
FAR G-sec investments drop ₹17,000 crore amid rising global bond yields, rupee depreciation
