Indian Debt Market Sees Sharp Reversal as Foreign Investors Flock to Bonds

Foreign investors continued to pull money out of Indian equities but debt markets witnessed a sharp reversal in trend as overseas investors increased allocations to bonds amid improving liquidity conditions, easing yields and a series of measures announced by the Reserve Bank of India (RBI) to attract foreign capital. According to Edelweiss Mutual Fund ‘s latest fixed-income market update, while foreign portfolio investors (FPIs) withdrew Rs 63,450 crore from equities on a month-to-date basis in June and calendar year-to-date outflows reached Rs 2,88,382 crore, the debt markets have a different story. In shrp contrast, debt markets received net inflows of Rs 22,695 crore in the first half of June, taking fiscal year-to-date debt inflows to Rs 14,626 crore and calendar year-to-date inflows to Rs 30,961 crore. The report said improving domestic liquidity conditions and recent RBI measures aimed at attracting foreign capital into the debt market helped support bond inflows even as investors remained cautious on equities. A key development during the first half of June was the sharp fall in government bond yields following measures announced by the RBI to encourage overseas capital inflows. Edelweiss said bond yields declined after the central bank announced a series of initiatives to attract foreign capital. The RBI expanded avenues for foreign currency inflows through measures linked to foreign currency non-resident deposits, external commercial borrowings and other channels. It also broadened the universe of securities available under the Fully Accessible Route by including all new issuances of 15-year, 30-year and 40-year government securities. Surplus liquidity conditions in the banking system and declining crude oil prices further supported bond prices and contributed to the decline in yields. The easing in yields was not restricted to government securities. The Edelweiss report said activity in the primary corporate bond market has started improving after relatively subdued issuance during the first two months of the financial year, when elevated yields prompted several borrowers to rely on bank financing instead of bond markets . “Yields on high-rated corporate bonds also softened amid growing market confidence that policy support will help stabilize funding conditions and the rupee. The revival in the primary market comes after comparatively muted activity in the first two months of the current financial year,” Edelweiss said. The report pointed to a notable improvement in liquidity conditions across the banking system. Money market rates across certificate of deposit and commercial paper segments declined during the first half of June as RBI measures pushed the financial system into surplus liquidity. According to Edelweiss, lower short-term rates indicate efficient transmission of policy easing across the front end of the yield curve. “The improved liquidity environment facilitated efficient transmission of policy easing to the short end of the curve,” the report said. Another factor supporting Indian debt markets has been the sharp decline in crude oil prices. The report attributed the decline to easing global supply concerns after the United States and Iran announced a framework agreement aimed at ending their conflict. “Crude oil prices declined after the US and Iran said they had agreed on a framework deal to end the war which eased supply concerns,” Edelweiss said. The decline in yields extended beyond benchmark government securities. According to the report, improving foreign inflows, supportive liquidity conditions and expectations of policy stability outweighed inflation concerns and supported demand for state-issued debt. Government bond markets also benefited from the RBI’s decision to expand the range of securities eligible under the Fully Accessible Route, a move aimed at making Indian sovereign debt more accessible to foreign investors. International fixed-income markets provided an additional tailwind for debt assets. The report noted that improving global risk sentiment and declining energy prices contributed to stronger demand for bonds across major markets. At the same time, Indian debt markets stood out because of improving domestic liquidity conditions and targeted RBI measures designed to attract foreign capital. Edelweiss said foreign investors continued to reduce exposure to Indian equities amid global uncertainty and profit-booking, but debt markets have begun attracting fresh overseas money as liquidity conditions improve and bond yields move lower.