FPIs shifting focus as debt inflows surge amidst equity pullback

MUMBAI: Foreign Portfolio Investors (FPIs) have significantly increased their investments in the Indian debt market in 2024, with over Rs1 lakh crore flowing in so far this year.

This influx is largely attributed to India’s inclusion in JP Morgan’s Emerging Market Government Bond Indices in June. However, this bullish stance on debt contrasts sharply with their behavior in the equity markets, where FPIs have been steadily pulling out funds.

In August alone, FPIs pumped Rs11,336 crore into Indian debt, reinforcing their preference for bonds. This follows substantial investments of Rs22,363 crore in July, Rs14,955 crore in June, and Rs8,760 crore in May.

Over Rs1tr in debt

According to data from the National Securities Depository Ltd (NSDL), total FPI investments in Indian debt markets have reached Rs1,02,354 crore since the beginning of 2024.

Conversely, the equity markets have seen an outflow of Rs16,305 crore in August, as FPIs divest amidst concerns over the Yen Carry Trade, potential recession in the US, and ongoing geopolitical tensions in the Middle East.

Despite these outflows, the cumulative FPI investment in Indian equities in 2024 remains positive, with Rs19,261 crore invested so far, albeit far overshadowed by the debt market inflows.

High GDP growth

The strong FPI interest in Indian bonds can be traced back to their inclusion in JP Morgan’s Emerging Market Bond Index, which commenced in June 2024.

 Indian government bonds are set to gradually increase their weightage in the index, reaching 10 per cent by March 2025. This inclusion has made Indian bonds more attractive to global investors, seeking to capitalise on the country’s robust economic growth, stable governance, and improving inflation outlook.

Experts also point to India’s high GDP growth rate of 8.2 per cent in FY 2023-24, with an expected 7.2 per cent growth in the current financial year, as additional factors driving foreign investors’ confidence in Indian debt over equities.

This trend of FPIs favoring debt over equity is becoming increasingly pronounced, with August’s figures underscoring the significant shift in foreign investment strategies in India.