Foreign portfolio investors (FPIs) turned net sellers of government securities under the fully accessible route (FAR) for the first time in November since their inclusion into the JPMorgan emerging market index.
FPIs outflows were primarily driven by volatility in the rupee, narrowing interest rate differential between the US treasury yields and the yield on the Indian government bonds and falling expectations of a deep rate cut by the US Federal Reserve in its upcoming monetary policies, said market participants.
According to data from the Clearing Corporation of India, FPI investment in government securities under the FAR route declined to Rs 2.41 lakh crore as of November 29, down from Rs 2.48 lakh crore as of October 31.
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In the first half of November, the benchmark 10-year US Treasury yield jumped more than 14 basis points to trade at 4.43%, hitting its highest level since July, as investors bet a Trump presidency would increase economic growth and potentially fiscal spending. This led to narrowing interest rate differential between US yields and Indian government bonds, making latter less appealing to foreign investors.
The yield on the 2-year Treasury was up by about 7 bps to 4.27%, reaching its highest level since July 31. The yield gap between benchmark bonds of India and the US dropped to 2.39 percentage points earlier this month, the narrowest in just over a year.
The rupee remained under pressure due to foreign investors pulling out of the domestic equity market and strong demand for dollars from importers. Moreover, the dollar index hovering around 106 and lower evaluation of the Chinese currency also weighed on the rupee.
Usually, an uptick in US Treasury yields and volatility in the rupee prompt FPIs to pull out their money from emerging markets such as India.
“FPI inflows will remain under pressure in December as well because they close their books in that month. So, they will tend to book profits. We will see an incremental start in foreign flows from January,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
Global investors are likely to remain on the sidelines until there is a clarity over policies taken by Trump’s administration,
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