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FPIs lose market share in government bonds

FPIs lose market share in government bonds

19 May 2021

Mumbai: Foreign portfolio investors who poured in billions of dollars in equity have remained silent in sovereign debt investments during the pandemic year. Their share in government bond ownership has slipped during the pandemic year despite record government borrowings, in line with the trend in most emerging markets where the fiscal expansion is a concern.

The share of foreign portfolio investors (FPIs) in ownership of central government securities fell to 1.87 per cent in March’21 from 2.44 per cent, according to the latest RBI data. This happened despite record government borrowings during the year.

“FPIs are more focused on equity than bonds as the return on equity is very attractive” said Soumyajit Neogi, associate director at India Ratings.” Globally interest rates are going up and interest rate differential is not favourable for the considering risk of fiscal, inflation, growth and recent COVID-19 outbreak. They might be cautious”

The stock of central government bonds rose almost 18 per cent From Rs 65 lakh crore to Rs 76 lakh crore in FY’21. It is likely that FPIs did some purchases during the year, but the bulk of it was done by the central bank which could shronk the share of FPIs

Dealing with the pandemic has cost most emerging markets investment by FPIs. Foreign ownership in emerging market bond markets has fallen in 13 of the 17 countries since the onset of COVID-19, according to Institute of International Finance data published in a Nomura report.

“The massive fiscal expansions in all of these countries in response to the health crisis is noteworthy” said, Rob Subbaraman, head of global macro research at Nomura in a report. Besides, risk premia are also rising he said.

Interestingly even commercial banks and insurance companies have remained on the sidelines, RBI data shows. As for commercial banks, their share in government bond ownership fell from 40.41 per cent in March’20 to 37.77 per cent in March’21. Besides the central bank which has consciously buying bonds to release liquidity into the system to revive the economy, only mutual funds and corporate investors have managed to increase their share of government bonds during the year. RBI’s share in g-sec bond ownership rose from 15.13 per cent to 16.20 per cent during the period.