After turning net sellers of government bonds under the fully accessible route (FAR) for the first time since India’s inclusion in the JP Morgan Global Market Index — Emerging Suite in November, foreign portfolio investors (FPIs) have again turned net buyers in December.
FPIs increased their positions held under the fully accessible route to Rs 2.51 lakh crore against Rs 2.43 lakh crore a month ago.
The appointment of the new governor of the Reserve Bank of India has boosted the expectations of a rate cut in February.
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This prompted foreign investors to take a positive view on the government bond market despite the rupee being under pressure. The new RBI governor, Sanjay Malhotra, is perceived to be dovish in his approach, therefore, the market is confident about India going for a rate cut in February, said traders.
If the central bank does not go for a rate cut as expected, it may announce additional measures to infuse liquidity in the market, such as open market operations or buybacks.
These will in turn help yields on the government securities to ease. Moreover, end of supply of government bonds in February is also boosting the demand for the same.
Hence, the interest rate differential between safe-haven and emerging markets would narrow, making latter more appealing to the foreign investors.
However, the sharp depreciation in the rupee, driven by dollar strengthening, and surge in the US Treasury yields, prompted foreign investors to not take aggressive bets on the domestic bond market.
Another factor that has slowed down the pace of foreign flows in the government bond market is expectations of the rupee getting depreciated further. Since the domestic currency being overvalued by 8% vis-a-vis its Asian peers, apprehensions of it falling further has risen.
“Foreign investors are worried and apprehensive about the rupee depreciating further as dollar is expected to remain elevated. Therefore, they are not taking large or aggressive bets in the government bond market,” said a trader with a foreign bank.
Since September 17, when the US Federal Reserve cut the interest rate, the dollar has strengthened by 7%.
Consequently, the dollar index has risen from 105.44,
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