Mumbai: Foreign portfolio investors (FPI) turned net buyers of local debt securities for the first time this calendar year.

They purchased a net of $1.635 billion worth of bonds in August, bucking the trend of monthly net sales in the first seven months of 2021, show data from the National Securities Depository (NSDL).

Global investors resumed buying after the central bank had hinted at retaining an ‘accommodative’ rate stance to drive growth. This is the largest single-month net purchase of debt papers since March 2019, when FPis had bought $1.74 billion.

“Clearly, the pace has picked up once the wheels of the economy got moving,” said Sriram Krishnan, managing director, Deutsche Bank India. “Increased FPI flows into Indian fixed income can be attributed to the accumulation of deals and discussions during the pandemic period.”

The exchange rate has played a role too in wooing yield-hungry international debt investors.

“Record-high rupee liquidity, drop in inflation and decline in the rupee hedging cost has made Indian debt attractive,” said Anindya Banerjee, a currency and fixed-income analyst at Kotak Securities. “A relatively stable rupee on the back of the dovish US Fed and positive growth momentum are factors that may have encouraged FPIs to bet on India’s debt,” he said.

The durable surplus liquidity in the banking system is now at ₹11.33 lakh crore.

The one-month Bloomberg USDINR volatility index dropped 10 points to 4.65% in August.

This year, overseas investors net sold $1.5 billion worth of debt securities compared with about $7 billion net invested in local equities.

Global central banks have resorted to bond purchase programmes to infuse liquidity into the system, a move aimed at arresting the rise of the pandemic’s economic costs. This has pushed interest rates into negative territory.

The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, show an estimate by Financial Times.

Government bond yields have tumbled in the past few months, especially after the US monetary authorities hinted at an immediate tightening of rates. The US Treasury benchmark dropped about 40 basis points to 1.31% in the past six months. This has collectively burnished the allure of emerging market debt securities, particularly when the cost of covering currency risk is lower. Hedging costs dropped at least 100 basis points across different forward contracts running into months.

Earlier on August 6, the Monetary Policy Committee voted in favour of extending the accommodative stance “as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy”.

The central bank aimed to ensure that inflation remains within the target band of ±4%.