The debt market saw a turnaround in April after a year of consistent and robust monthly inflows from foreign portfolio investors (FPIs). Market participants expect selling pressure to persist, with hopes that the bond market will return to stability following inclusion in the JPMorgan Bond Index in June.
“Active investors who have come in may be selling for a while,” said Vikas Goel, managing director and chief executive officer of PNB Gilts.
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“It’s temporary… there will be some outings but they will be marginal. There is no trigger now to buy, and that is why I think there is a certain amount of selling,” he added.
On Tuesday, FPIs sold Rs 3,363 crore worth of bonds in a single day. In the current week, they sold around Rs 2,669 crore worth of government bonds.
FPI investments in government bonds fell about 5.5 percent over the past month. They sold Rs 6,530 crore worth of five-year bonds, which is the most liquid bond among the fully accessible route (FAR) securities.
In September 2023, JPMorgan included India in its flagship GBI-EM Global Diversified Index. India will join the index with 1 percent in June. The weighting will increase by 1 per cent every month up to 10 per cent in April 2025. Subsequently, on March 5 of the current year, Bloomberg Index Services revealed that Indian government bonds would be added to its index of governments in local currencies of emerging markets from January 31. , 2025.
In 2023-24 (FY24), domestic markets witnessed foreign inflows of Rs 3.23 trillion, a notable turnaround from the Rs 45,365 crore outflows recorded in 2022-23. Of the total inflows, foreign investors injected Rs 1.2 trillion into the debt segment, marking the highest inflow since 2014-15, according to National Securities Depository data.
In the last quarter of FY24, foreign investors pumped Rs 54,492 crore into the debt market, leading to a decline in the benchmark bond yield by 14 basis points over the period. Yields also fell because the US Federal Reserve Committee hinted at three rate cuts in 2024.
After capital inflows via index inclusion, the highly anticipated event of the year was the Federal Reserve’s rate cut. However, higher-than-expected US inflation data indicates interest rates will remain high for longer.
The expected timeline for the first rate cut was pushed back due to rising U.S. Treasury yields, postponing the previous expectation of a cut in June. Some market segments now expect the first rate cut to come in December 2024. Additionally, the forecast for three rate cuts for the year has been revised down to two.