Foreign portfolio investors (FPIs) have poured a record $15.86 billion into Indian debt so far this calendar year, according to data available till July 11. This is the highest amount of net inflows into Indian debt on a year-to-date basis. Tuesday itself witnessed $1.217 billion of inflows — of which a majority is believed to be in government bonds — thus offsetting the minor selling seen earlier this month. Compared to this, the last year had witnessed a net outflow of $1.72 billion in the same period. As Ananth Narayan, regional head of financial markets, ASEAN and South Asia at Standard Chartered Bank, points out, various factors, including prospects of political stability and upbeat macros, have significantly contributed to fund inflows.

“From an overseas investor perspective, our currency and fixed income macros are looking good this year — oil prices have stayed low, inflation is under control, reforms in the form of GST continued, prospects for political stability have improved after UP election results. This has resulted in the FPI money coming in — both in equity and in debt,” Narayan said.

Investors appear to have viewed the BJP’s sweep in the Uttar Pradesh Assembly elections this year as a big positive for the economy and reforms. The major surge in the inflows commenced since March when the election results were out.

A report by Nomura points out that according to data available as of end-May, mutual funds were the largest holders of Indian debt securities and account for 25% of all debt held by FPIs. Long-term investors such as central banks (7%), sovereign wealth funds (7%), supranational organisations (4%) and government agencies (2%) hold 20% of all Indian debt securities.

Yield-hungry investors also tend to look at Indian debt as an attractive source of investment considering the fact that returns are still higher compared to other nations. Even on the foreign currency corporate debt side, investors have shown considerable interest evident from the tight spreads received by many issuers.

Rural Electrification Corporation (REC) and HPCL saw the final pricing get tighter by over 32 basis points from the initial price guidance for their overseas bonds. “In a relative sense, real interest rates in India are still seen on the higher side compared to the rest of the world,” Narayan said.

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A strong currency is also one of the reasons that supported the flows. The rupee has been one of the top performers in the emerging market segment this year. “INR may still outperform most of its EM peers, supported by lower external trade dependence, stronger policy and macro fundamentals and a vigilant RBI,” a Kotak report stated. However, bankers say the extent of possible complacency might be a cause for concern despite sound macros. “We have seen exporters extending their hedges, importers not hedging their exposures, corporates borrowing money in foreign currency not hedging their exposures, and unhedged FPI inflows. In addition, the relative outperformance of the rupee increases the risk of increasing imports and increase in current account deficit. CNY has depreciated by 7% against INR since 2016 – with our $60 billion of manufactured product imports from Greater China, this is not good news for domestic industry and production. I believe we should see a gentle depreciation in the rupee in near term,” observed Narayan.