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FPIs withdraw from Indian bonds amid raging 2nd wave

FPIs withdraw from Indian bonds amid raging 2nd wave

07 May 2021

Mumbai: Debt investors are dumping India amid rising fears that growth could be tepid and interest rates could spike due to high government borrowing.

Foreign portfolio investors (FPIs) have sold a net of `16,787 crore worth of debt securities since January 1, show data compiled by ETIG Database. In contrast, they purchased a net ₹38,442 crore of equities, betting on the country’s growth prospects.

“India’s macro deceleration will likely hit companies’ creditworthiness and their ability to service their debt obligations,” said Hemant Mishr, founder of SCUBE Capital, a Singapore-based fund.

“A rotation is happening away from onshore Indian bonds on the back of risk aversion, triggered by the second (Covid-19) wave,” he said. “This in turn will likely put the rupee under pressure amid growth concerns if the situation is not quickly brought under control.”

The rupee has turned out to be the worst performing Asian currency in April with the local unit losing 1.32% to the greenback, show Bloomberg data. A fall in the rupee’s value crimps realisation of investment returns for offshore investors.

Ratings company S&P cut India’s economic growth outlook citing localised restrictions on mobility in the wake of the second wave of Covid-19. It has retained India’s rating outlook as ‘stable’, limiting risk of any immediate sovereign rating downgrade.

The utilised debt investment limits, a gauge for offshore investor optimism, plunged to 23% for corporate and 39.7% for sovereign securities from about 54% for both at the beginning of the last financial year, show data from National Depository Securities. The pandemic had hit India hard, curbing economic activities.

“The much-awaited inclusion of Indian government bonds into the global bond indices could significantly help reverse the current trend,” said Sriram Krishnan, managing director & co-head of global transaction banking at Deutsche Bank India. “Also, the finance minister has previously spoken about permitting the ICSD model for Indian government bonds.”

FPIs Withdraw from Indian Bonds Amid Raging 2nd Wave

International Central Securities Depository is a dedicated financial service organisation, which settles trades internationally. Local authorities have proposed to commence the process of implementation of international settlement of sovereign securities by ICSDs.

“While the impact of Covid-19 is leading to fixed income outflows at the moment, we believe that an improvement in the situation, coupled with the inclusion in global bond indices and implementation of the ICSD model, can provide a perfect antidote,” said Krishnan.

S&P Ratings said it still expected the economy to expand for the year as a whole, even though it said there were downside risks to its current baseline projection of 11% growth. It expects growth rate to fall to 9.8% under its moderate scenario and to 8.2% under the severe scenario based on when the current infection wave peaks.

Record low interest rates are also forcing overseas investors in debt to exit as they do not see any further capital appreciation. If interest rates rise in coming quarters, the existing bonds will lose value with yields rising — when bond yields rise, prices fall.

“Although the same logic could be applicable for US treasuries, investors always seek safety of investment amid uncertain time,” said a global fund manager.

US Treasuries have been rising since August last year amid signs of economic improvement indicated by falling joblessness and rising consumer spending.