Investment by foreign portfolio investors (FPIs) into fully accessible route (FAR) bonds surged to a five-year high of Rs 1.32 lakh crore in 2024-25, driven by inclusion of government securities in the JPMorgan Global Bond Index and Bloomberg Emerging Market Local Currency Government indices.
FPIs invested Rs 21,600 crore in March, the second-highest inflow of the year after August, which had seen investments of Rs 24,000 crore.
Offshore flows from index funds into Indian sovereign bonds were broadly in line with expectations, according to Deepak Sood, partner and head – fixed income, Alpha Alternatives, an asset management firm.
“While there was some volatility due to the sharp depreciation in the rupee ― prompting active traders to trim exposures ― passive index-tracking funds continued to ramp up their allocations in line with the rising index weight,” said Sood. “The past month also witnessed a significant uptick in foreign investor participation in high-yield corporate bonds. Special situation financing, particularly acquisition-linked debt, has garnered strong interest, leading to concentrated FPI inflows in this segment.”
JPMorgan Chase announced in September last year that it would add Indian government bonds to its benchmark GBI-EM index from June 28. In March 2024, Bloomberg announced that Indian government bonds will be included in its Emerging Market (EM) Local Currency Government Index and related indices from January 31, 2025. Securities included in global bond indices do not have any foreign investment limits.
Rising foreign inflows due to index inclusion, fiscal consolidation and cooling of US treasury yields have softened bond yields over the past one year.
Experts say movements in US treasury yields and currency movements will remain key variables, influencing the trajectory of foreign flows into debt markets.
“Foreign investors have shown strong buying interest in longer tenure government bonds as they expect interest rates to move downwards,” said a dealer at a primary dealership. A decline in US Treasury yields will further make government bonds attractive, he added.