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January outflow: FPIs sell rupee bonds worth $1 billion

Bhavik Nair
fpi, foreign portfolio investment

Foreign portfolio investors (FPIs) have sold more than $1 billion worth of bonds in January so far, possibly apprehensive of large government borrowings in 2020-21, rising inflation and elevated crude oil prices, reports Bhavik Nair in Mumbai. Indian companies are, however, able to tap the overseas markets with investors willing to buy dollar bonds that don’t carry a currency risk.

Dollar bond issuances by Indian companies have crossed $3 billion in 2020 so far.

On Monday, the yield on the benchmark closed at 6.64%; the yield has remained in the range of 6.50-6.80% over the last one month. The government gross borrowing plan for 2019-20 is Rs 7.1 lakh crore while net borrowings are budgeted at Rs 4.48 lakh crore.

Ananth Narayan, professor-finance at SPJIMR, observed that uncertainty over the fisc and the borrowing programme for 2020-21 as also the higher December CPI inflation, which may have dented chances of a rate cut in near term, could have soured the sentiment. "Although the CAD looks fine as of now, there are concerns over the rupee's long term outlook. The RBI has been continuously buying dollars preventing the appreciation of the rupee beyond a certain point and that is hurting any potential returns for the FPIs," Narayan explained.

Data shows that the general category of foreign investors has utilised 72.05% of its investment limit of Rs 2.46 lakh crore in government securities. At the same time, foreign investors have utilised only 58% of the investment limit of Rs 3.17 lakh crore in corporate bonds.

Retail inflation in December was 7.35% - over five-and-a-half year high - putting paid to hopes of a rate cut in the February monetary policy. Most economists view the rising inflation as transitory and driven by higher prices of vegetables and expect a rate cut in April.

However, US-Iran tensions in early January had led to a spike in oil prices that saw Brent prices touch $70 per barrel. A spike in oil prices is negative for India as it results in a widening trade deficit and this, according to experts, is likely to have contributed in some way to the sell-off. Dealers, however, have also pointed out that if yields rise beyond a certain point after the Budget, FPIs may re-emerge as big value buyers.

Meanwhile, Indian firms continue to tap the overseas bond market. A senior executive at a foreign bank told FE that offshore markets have a huge appetite for Indian paper given the yields are attractive and there is ample liquidity.

"For many NBFCs, offshore markets are becoming a lifeline right now. Policymakers should do something that could help Indian firms reduce hedging costs - for instance provide a subsidy on the hedging cost. If that happens, more firms will tap the overseas market," the banker said.