FPIs scale back buying as interest rate gap shrinks

Foreign portfolio investors’ (FPIs) holdings of government bonds under the fully accessible route have declined, but they remained net buyers in February as the yield gap between US and domestic bonds narrowed.

When the interest rate differential between US and domestic yields narrows, FPIs usually exit emerging markets in favour of safe-haven assets. This trend has also put pressure on the rupee.

“The month of January was a net negative month for FPI activity in bonds. Meanwhile, in February, we saw the yield on the 10-year US treasury coming off from 4.60% to around 4.20%, a 30-35 basis point sharp decline in the second half of February. Second, India is a high yielding bond market with almost 8-9% weight now, and people are running with an under-invested position, and people cannot run underweight positions for a very long period from India,” said Dhawal Dalal, CIO-fixed income, Edelweiss Asset Management.

According to the Clearing Corporation of India (CCIL) data, investment by FPIs in government securities in the global bond index reduced by `8,946 crore. FPI investment in Fully Accessible Route (FAR) securities stood at `2.66 lakh crore as on February 24, as compared to Rs 2.75 lakh crore as on February 7. On a month-on-month basis, they bought `16,468 crore. In January they bought around `14,435 crore. The pace of buying has slowed down from 0.6% in month of January to 0.5% in February. 

On the other hand, Indian bond yields, especially the 10-year benchmark bond have not moved much and remained mostly range bound due to better macroeconomic conditions, better inflows from FPIs, and higher demand from long-term investors such as EPFO, pension funds, and insurance companies. This has led to a narrowing of the gap between India and the US bond yields.

FPIs have invested around `11,000 crore following India’s inclusion in the Bloomberg bond index. Earlier, they had invested `62,431 crore in government bonds as of November after the JP Morgan index inclusion, according to the Economic Survey 2025 released on January 31.

“The large part of the rupee depreciation has got over and yields on domestic bonds still look attractive to foreign investors and this is the reason that we might have seen inflows as these are not any massive flows, indicating a slow down in their buying momentum,”

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