FPI inflows into Indian G-Secs dry up as US rate hike looms

Synopsis

Foreign investors are reducing positions in Indian debt after a key index inclusion was delayed. Inflows into Indian debt have significantly slowed down over the past two weeks. US treasury yields have become more attractive, influencing investor decisions and market sentiment. Traders are awaiting the upcoming monetary policy announcement for further policy direction. Cooling oil prices and other inflows are helping to offset negative market sentiment.

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Traders said fresh data showing inflows through the ECB and FCNR(B) schemes and a cooling in oil prices helped offset the negative sentiment.

Mumbai: Market participants are closely watching foreign portfolio investor (FPI) activity in fully accessible route (FAR) securities as some investors, who had bought into them in anticipation of their inclusion in the Bloomberg global bond gauge, are expected to lighten positions accumulated over the past two months.

Inflows into Indian debt have already tapered over the past two weeks, with the daily average inflow in July being just about ₹300 crore. In June, the daily average FPI inflow in debt was 10 times more-at nearly ₹3,000 crore. On a monthly basis, FPIs invested ₹41,774 crore in June and ₹7,581 crores in July, CCIL data showed.

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On Monday, the benchmark 10-year bond yield reacted marginally to Bloomberg's decision to defer inclusion of India in the Index. Traders remain wary of one key medium-term risk-the possibility of interest rate hikes by the US Federal Reserve.

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watch out More outflows likely with Bloomberg delaying India’s inclusion in global bond gauge

"One or two hikes are being priced in because we don't know how global rates would be over the course of the year. But right now, the bias is towards staying put. I don't expect a major rally and 6.70% or lower levels are possible if oil prices fall further," said Alok Singh, head of treasury at CSB Bank.

Yields on 10-year government bond closed at 6.84% on Monday against 6.83% last Friday The one-year overnight indexed swap (OIS) curve averaged 5.88%, suggesting markets are pricing in at least one rate hike over the next 12 months.

FPIs offloaded their holding partly because the Bloomberg index provider delayed by two weeks announcing its decision on whether it would be including India in the index. Furthermore, yields on US treasury bills became attractive after they touched 5% and currently it is at 4.70, a trader with a private bank said.

Traders said fresh data showing inflows through the ECB and FCNR(B) schemes and a cooling in oil prices helped offset the negative sentiment.

Traders are not taking a large position ahead of the monetary policy scheduled to be announced on Wednesday even as an ET poll of 12 economists said that the central bank will maintain the policy rate unchanged yet again. Markets will closely watch the RBI's commentary for any hawkish signals, which could provide clues on the future path of monetary policy, treasury heads said.

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