Markets

Foreign fund flows into debt to continue

Mumbai: The latest Federal Reserve policy decision will likely have a calming influence on the bond and currency markets halfway across the world. And Mumbai’s source of comfort is not the Fed’s rate action Wednesday but its general commentary on the cost of funds in the world’s biggest economy.

Hence, bond buyers and currency specialists in India are now factoring in just two more increases in the US rate-tightening cycle this year instead of three. That would still leave a gap in real-interest rates, a gap significant enough for overseas investors to continue pouring funds into the world’s fastest-expanding major economy where inflation has remained largely subdued.

“Foreign portfolio investors (FPIs) will continue to monitor India carefully while there is no additional reason for them to exit India after the latest US Fed policy,” said Ajay Marwaha, head – investment advisory and EM capital markets, Sun Global Investments, UK. “Overall, the Fed policy has remained balanced against market expectations of being overtly hawkish…The rupee is also expected to be stable.”

The rupee gained 0.16% or 10 paise to close at 65.11 a dollar Thursday. During the day’s trading, the local unit rose to a high of 65.02.

FPIs have net sold Rs 9,109 crore worth of Indian bonds in March as they rushed to buy US dollar backed assets amid signs of higher rates. They were mostly net investors in the past 12 months, show data from the National Securities Depository.

The local unit is likely to trade in the range of 64.5-65.20 in the next few weeks, with some overseas investors already showing renewed interest in domestic debt assets, dealers said.

“From the US, the expected headwinds in the form of more rate hikes and the unwinding of monetary largesse are less pronounced than considered earlier,” said Sandeep Bagla, associate director at Trust Capital, which facilitates FPI investments in India running into thousands of crores.

“Consequently, emerging markets offering high real rate should logically see overseas fund inflows into debt assets,” Bagla said.

The gap between the benchmark government bond yield and anticipated average retail inflation in FY19 would be 300 basis points, an attractive real rate hardly seen in other emerging economies with sound macro fundamentals.

Concerns over higher inflation in the second half of the next financial year have led to higher yield in the domestic debt market that is already pricing in at least two-three rate increases in the foreseeable future.

“The stage seems set for large and sustainable fund inflows into debt assets subject to available investment limits,” Bagla said.

FPI debt investment limit, pegged at Rs 1.86 lakh crore (or 55% of outstanding gsecs), is nearly exhausted and the government is considering an expansion.

“The rupee may gain more stability, giving a cushion to overseas investors at least for now,” said Anindya Banerjee, currency analyst at Kotak Securities.

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