Foreign portfolio investors (FPIs) pulled out nearly $443 million from the bond market between Monday and Thursday. This is higher than the total net outflow of $370 million from the bond markets in January.
Although the Reserve Bank of India (RBI) turned dovish on Thursday, trimming the key repo rate by 25 basis points to 6.25 percent, foreigners were sellers on Thursday. On Friday, the yield on the benchmark closed at 7.52 percent, up 2 basis points over Thursday s close.
Treasurers believe investors are pulling out fearing fiscal slippages following the largesse to farmers proposed by the government in the interim Budget. The Budget also proposed zero tax for individuals having a taxable income up to Rs 5 lakh, and also withdrew the tax on notional rent on a second self-occupied house.
The rupee appreciated by 0.2 percent to 71.32 on Friday, compared with 71.45 on Thursday.
The RBI in its sixth bi-monthly monetary policy meet on Thursday relaxed the rules for FPI holding of corporate bonds by withdrawing its April 2018 regulation wherein no FPI was allowed an exposure of more than 20 percent of its corporate bond portfolio to a single corporate. Pankaj Pathak, fund manager at Quantum Mutual Fund, said, We do not expect large flows immediately as fiscal concerns and political uncertainty will weigh on investor sentiment.
The quota for FPI investment in gilts was Rs 2.23 lakh crore as on February 8, according to CCIL data. The utilisation as on February 8 was 72.5 percent for gilts.
The NSDL data show that as of February 7, the limit for FPI investments in corporate bonds was `2.89 lakh crore while the utilised level was 70.26 percent.
FPIs invest in various debt market instruments such as government bonds (G-secs), state development loans and corporate bonds, but with prescribed limits and restrictions by the RBI.