FPI Inflows Plummet as Debt Investors Brace for US Rate Hike Uncertainty

FPI Inflows Plummet as Debt Investors Brace for US Rate Hike Uncertainty​

The trajectory of Foreign Portfolio Investor (FPI) activity in Indian debt instruments is showing clear signs of deceleration. As global market participants await clarity on the monetary policies set by the US Federal Reserve, funds previously looking to position themselves ahead of potential inclusion in the Bloomberg global bond gauge are now expected to gradually lighten their stakes.

The sharp cooling in FPI inflows has been evident over the past fortnight. The daily average inflow into Indian debt in July stood at approximately ₹300 crore, a stark contrast to the previous month. CCIL data reveals that during June, the daily average FPI investment stood significantly higher at nearly ₹3,000 crore.

Tapering FPI Investment and Monthly Performance​

On a monthly basis, commitment from foreign funds has also softened. FPIs invested ₹41,774 crore into debt instruments in June. This figure moderated considerably in July, with investments totaling ₹7,581 crores.

Traders have pointed to multiple factors contributing to the caution. The delay by two weeks from Bloomberg in announcing its decision regarding inclusion in the global index led some investors to reduce their positions. Furthermore, traders noted that US Treasury bills are currently attracting considerable interest after hitting 5% and settling at 4.70%.

Indian Bond Yields React Amid Global Rate Concerns​

The fixed income market remains highly sensitive to external shifts, particularly regarding U.S. interest rates. The benchmark 10-year government bond yield closed at 6.84% on Monday, marginally higher than the 6.83% recorded last Friday.

Adding context to this movement, the one-year overnight indexed swap (OIS) curve averaged 5.88%, suggesting that markets are factoring in expectations of at least one rate hike by the Federal Reserve over the next twelve months.

Outlook and Analyst Insights on Monetary Policy​

The market is collectively holding a cautious bias ahead of the monetary policy announcement scheduled for Wednesday. While an EconomTribune (ET) poll surveying 12 economists suggested the central bank would maintain its current policy rate, experts are focused on granular details.

Alok Singh, head of treasury at CSB Bank, commented that one or two hikes are being priced into the market due to uncertainty surrounding global rates throughout the year. He stated that a major rally is not anticipated and that 6.70% or lower levels could be possible should oil prices decline further.

Factors Offsetting Negative Sentiment in Treasury Market​

Despite the general nervousness, certain segments of the debt market have shown resilience. Traders noted that fresh data indicating steady inflows through the ECB (Extrabudgetary Compensatory Lending) and FCNR(B) schemes has helped offset some of the negative sentiment observed recently. Cooling trends in oil prices were also cited as a positive counterbalance to domestic selling pressure.

Treasury heads emphasized that market participants will be closely scrutinizing the RBI’s commentary during the announcement. Any hawkish signals from the central bank could provide crucial clues regarding the future path of monetary policy, irrespective of the announced rate decision.