Mumbai: The Centre’s commitment to fiscal consolidation in the budget seems to have spurred foreign investors to step up purchases of government bonds, with overseas investment in such debt well poised to head past the $2 billion-per-month flow that was expected after inclusion in a JP Morgan index.
Aggregate holdings of foreign portfolio investors (FPI) in index-eligible fully accessible route (FAR) government bonds increased by ₹1,963.7 crore to ₹1.9 lakh crore on Tuesday, following the presentation of the FY25 budget.
On Wednesday, the FPI holdings of FAR bonds rose further, with the total holdings crossing the ₹2 lakh crore mark, according to data published by the Clearing Corporation of India (CCIL) at the end of trading hours on Wednesday.
Counting June 28 – the day that inclusion of Indian bonds in a JP Morgan index commenced – FPI investment in the FAR category has risen by ₹15,383.73 crore, or around $1.8 billion, the data showed.
“Investors, both domestic and international, have taken a positive view of the budget outcome including the government’s commitment to fiscal consolidation, and expect debt investment inflows to continue. The July investments by FPIs are likely to exceed $2 billion and may continue at a higher pace going forward as well,” said Parul Mittal Sinha, head-financial markets, India and South Asia at Standard Chartered Bank.
After receiving a fiscal windfall in the form of a huge surplus dividend transfer from the Reserve Bank of India, the Centre said on Wednesday that it is aiming for a fiscal deficit target of 4.9% of GDP in FY25, lower than the 5.1% target spelt out in the interim budget in February. The government also reduced its gross and net market borrowing for FY25 by ₹12,000 crore to ₹14.01 lakh crore and ₹11.63 lakh crore, respectively.
Yield on the 10-year benchmark government bond, which closed at 6.96% on Wednesday, has eased 22 basis points so far in 2024, even as global markets have witnessed considerable volatility. While the steady foreign flows have kept sovereign bond yields anchored, treasury executives do not see much more room for a fall in long-term yields till the RBI shows signs of cutting interest rates.
“Overall, the commitment to fiscal consolidation is a positive for the market but I do not see the yield on the 10-year bond falling below 6.95% till we have some clarity on the RBI turning towards easier monetary policy. On the upper end, the 10-year yield should be contained at 7.01%,” said Vikas Jain, head of India trading, fixed-income, currencies and commodities at Bank of America.