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Ria Jain made post

Is it true that FPIs have been selling heavily in the debt segment? What is the main reason for this selling?

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Anu Biswas answered.
5 days ago

Post Mar-20, the FPI flows into equity have been more or less positive or at worst tepid. However, FIIs continue to sell heavily in the debt market. If you add up the Jan-Jul period, FIIs sold Rs.108,000 crore of debt in the Indian markets. One question is whether the FIIs do not have enough limits to invest in debt. But, that is not the case.

It is not about FII limits at all because FIIs have not used up even 50% of available limits in G-SECs and even in corporate bonds. We are not even talking about State Development Loans or SDLs. That is because in this case the FPIs are just not interested and have not used up 1% of their overall limits. Hence limit availability is hardly the issue.

In reality it is about the real rate of return. The real rate is what investors earn after inflation. Now that is what has shifted. Till one year back, Indian bonds offered real bond yields above 4% making them very attractive by global standards. However, in last 1 year, bond yields fell below 5.8% and inflation shot up to 8% resulting in negative real rates.

Other than Turkey, India has one of the lowest real returns on debt in the world. Even matured economies like Japan, EU region and Australia are now offering real rates of return that are better than India. So there is really no incentive for FPIs to invest in Indian bonds. Things could change only if yields go up sharply or inflation comes down.