Stretched valuations, surge in volatility force FPIs to trim exposure in bonds
The key reason for the shrinking share of foreign portfolio investors (FPIs) in Indian equities and debt markets is distended valuation.
By Ashutosh R Shyam, ET Bureau | Updated:
The key reason for the shrinking share of foreign portfolio investors (FPIs) in Indian equities and debt markets is distended valuation. While the sell-off in equities has been linked to domestic factors, the debt outflows have largely been impacted by peaking valuation of global debt.
This triggered a global bond rout and wiped out about $500 billion from the global bond market in the last two weeks. The sharp surge in volatility of global bond yields has heightened the risk of portfolios — better known as value at risk (VAR) in financial parlance — causing FPIs to pare their positions both in developed and emerging markets. As a result, FPI flows into Indian debt, too, have begun to dry up.
FPI Investments in the domestic debt market have shrunk significantly over the past three months. Inflows in March and April 2015 were Rs 5,949.6 crore and Rs 4,367 crore, respectively, way lower than the average monthly inflow of Rs 14,000 crore in FY15.
The picture in May so far is even bleaker as FPIs have been net sellers for the first time in 12 months. FPIs have invested $57 billion (Rs 3,42,360 crore) in Indian debt as on May 11, 2015 and have exhausted nearly 86% of the total investible limit, according to NSDL.
The sharp surge in global bond yields comes in the backdrop of the US 30-year bond yield reaching its highest level since November; the German 10-year yield nearing its peak in 2015: increasing nearly 14 times from the record low of 0.049% on April 17; and Japanese rates rising the most in two years. Overblown expectations about the European Central Bank’s quantitative easing plan helped push global debt valuations to extreme levels, triggering a ‘large and vicious’ sell-off in European bonds that’s infected other markets, according to Goldman Sachs, a foreign broker.
Adding to woes of the Indian debt market, the rupee depreciation and the introduction of new benchmark yields in a month are also keeping foreign portfolio investors at bay.
This triggered a global bond rout and wiped out about $500 billion from the global bond market in the last two weeks. The sharp surge in volatility of global bond yields has heightened the risk of portfolios — better known as value at risk (VAR) in financial parlance — causing FPIs to pare their positions both in developed and emerging markets. As a result, FPI flows into Indian debt, too, have begun to dry up.
FPI Investments in the domestic debt market have shrunk significantly over the past three months. Inflows in March and April 2015 were Rs 5,949.6 crore and Rs 4,367 crore, respectively, way lower than the average monthly inflow of Rs 14,000 crore in FY15.
The picture in May so far is even bleaker as FPIs have been net sellers for the first time in 12 months. FPIs have invested $57 billion (Rs 3,42,360 crore) in Indian debt as on May 11, 2015 and have exhausted nearly 86% of the total investible limit, according to NSDL.
The sharp surge in global bond yields comes in the backdrop of the US 30-year bond yield reaching its highest level since November; the German 10-year yield nearing its peak in 2015: increasing nearly 14 times from the record low of 0.049% on April 17; and Japanese rates rising the most in two years. Overblown expectations about the European Central Bank’s quantitative easing plan helped push global debt valuations to extreme levels, triggering a ‘large and vicious’ sell-off in European bonds that’s infected other markets, according to Goldman Sachs, a foreign broker.
Adding to woes of the Indian debt market, the rupee depreciation and the introduction of new benchmark yields in a month are also keeping foreign portfolio investors at bay.
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