In the fully accessible route (FAR) for government securities, the aggregate holding of foreign investors in their most favoured long-term bond has fallen by ₹1,192.6 crore over the past couple of months even as investment in other securities has remained broadly steady.
As on August 18, the aggregate holding of foreign portfolio investors (FPIs) in the 7.26%, 2032 government bond – an erstwhile 10-year benchmark security – accounts for 5.37% of the bond’s outstanding stock of ₹1.48 lakh crore, down from 6.17% on June 19, Clearing Corporation of India data showed.
The 7.26%, 2032 bond is one of the three most widely held bonds by FPIs in the FAR category, which does not have any limits on foreign investment. Longer-term securities pose a greater degree of risk on bond portfolios.
Overall foreign portfolio investment in the general category for central government securities has also dwindled, having fallen by ₹5,790 crore so far in 2023.
“On the FPI investments in fixed-income, given where the US interest rates are, any other fixed-income market is not looking that attractive right now. Within the emerging markets, given the overall macro-economic profile of India, it will attract some bit of interest going ahead,” said Ashhish Vaidya, managing director, DBS Bank India. “Given where we are right now, with a dollar yield of, say, 5% or 5.5% at the shorter end, the interest would be lower for an emerging market exposure and that’s exactly what you’ve seen over the last one year since the US started tightening.”
The US Federal Reserve has raised interest rates by a massive 525 basis points since March 2022 to combat high inflation. With the supply of US government debt piling up, the 10-year US bond yield approached a 16-year high of 4.33% last week. Higher US bond yields reduce the appeal of fixed-income assets in emerging markets.
Another factor that contributed to the waning interest in the 7.26%, 2032 bond was the fall in its secondary market liquidity after the security was replaced by a new benchmark bond in February.
“The FAR securities are also being utilised by the trading community and the FPI arms of foreign banks. This investor class typically will have a short investment horizon and their activity is for trading purposes. Hence, the trading liquidity of bonds becomes paramount,” said Nitin Agarwal, head of trading, ANZ. “There is a global narrative that long-term yields need to rise and for yield curves to steepen.” Yield on the 10-year benchmark government bond has increased 16 basis points since June 19, pushing up longer-term borrowing costs in the economy. Higher domestic inflation and the surge in US bond yields have been the key drivers of the increase.