Foreign portfolio investors have continued to inject funds into the Indian debt market, with a net inflow of over Rs 18,500 crore so far in February. This follows a high monthly inflow of over Rs 19,836 crore in January, the largest in more than six years. The upcoming inclusion of Indian government bonds in the JP Morgan Index is driving this bullish stance, and further front-loading before the actual inclusion in June is anticipated. These investments are aimed at deepening India’s underdeveloped debt markets and are attracted by factors such as attractive yield, stable macroeconomic indicators, and a relatively stable rupee. In contrast, foreign investors have withdrawn Rs 424 crore from equities during this period.
Foreign Portfolio Investors (FPIs) continue to invest in Indian debt market
Foreign Portfolio Investors (FPIs) have shown an ongoing bullish stance in the Indian debt market, with a net infusion of over Rs 18,500 crore in February alone. This follows a net investment of over Rs 19,836 crore in January, marking the highest monthly inflow in over six years. The influx of funds can be attributed to several factors, including the upcoming inclusion of Indian government bonds in the JP Morgan Index, the long-term aim to deepen India’s underdeveloped debt market, attractive yield and stable macroeconomic indicators, and the stability of the rupee.
Reasons behind the influx of funds
The upcoming inclusion of Indian government bonds in the JP Morgan Index is a major driving force behind the huge inflow of funds into the Indian debt market. This inclusion, set to take place in June 2024, is anticipated to attract $20-40 billion in the next 18 to 24 months. It is expected to make Indian bonds more accessible to foreign investors and strengthen the Indian rupee, thus bolstering the overall economy. Additionally, the attractive yield, stable macroeconomic indicators, and relatively stable rupee have all contributed to FPIs’ increased interest in the debt market.
In February alone, FPIs have made a net investment of Rs 18,589 crore in the Indian debt market. This brings the total investment by FPIs in the market to over Rs 38,426 crore in 2024 so far. This consistent investment in the debt market has been observed in the past few months, with FPIs infusing Rs 18,302 crore in December, Rs 14,860 crore in November, and Rs 6,381 crore in October. The steady flow of funds into the market is indicative of FPIs’ positive sentiment towards the Indian debt market.
JP Morgan EMBIGD inclusion in June 2024
The upcoming inclusion of Indian government bonds in the JP Morgan EMBIGD in June 2024 is a major driver for the huge inflow in the Indian debt market. This landmark inclusion is expected to attract significant foreign investments, with an estimated $20-40 billion flowing into the market in the next 18 to 24 months. The inclusion will make Indian bonds more accessible to foreign investors, ultimately strengthening the Indian rupee and contributing to the overall growth and stability of the Indian economy.
Withdrawal of foreign investors from equities
While FPIs continue to invest heavily in the Indian debt market, there has been a withdrawal of funds from equities. In February, FPIs pulled out Rs 424 crore from equities, following a massive withdrawal of Rs 25,743 crore in January. This shift in investment preference highlights a cautious approach by foreign investors, potentially driven by market conditions and risk considerations.
Effect on different sectors
The significant sell-off by FPIs in the banking sector indicates lower-than-expected results in terms of net interest margins. The competition in deposit mobilization has impacted the profitability of banks, prompting FPIs to reduce their exposure to the sector. This trend suggests that FPIs are closely monitoring sector-specific performance and adjusting their investment strategy accordingly.
Overall FPI flows in 2023
In 2023, FPI flows in equities amounted to Rs 1.71 trillion, while FPI flows in the debt markets reached Rs 68,663 crore. Collectively, FPIs infused a total of Rs 2.4 trillion into the Indian capital market. This strong influx of funds in both equities and debt markets signals the confidence that foreign investors have in the Indian market and its potential for growth.
Global interest in the Indian market
The resilience of the Indian economy and the trust that international investors place in its growth trajectory have attracted significant global interest in the Indian market. Foreign investors are captivated by the potential opportunities for investment and are optimistic about the long-term prospects of the Indian economy. This interest further reinforces India’s position as an attractive investment destination.
Comparison with previous years
The positive inflow of funds into the Indian debt market and the turnaround from net outflows in 2022 indicate a significant improvement in investor sentiment. In 2022, there was a net outflow of Rs 1.21 trillion, primarily driven by aggressive rate hikes by central banks globally. The consistent investment and positive sentiment in the last three years demonstrate the growing attractiveness of the Indian market among foreign investors.
Conclusion
The continued bullish stance of FPIs in the Indian debt market has had a positive impact on the economy and the capital market. The ongoing investment by FPIs, driven by various factors such as the upcoming inclusion in the JP Morgan Index, will contribute to the development and deepening of India’s debt market. This influx of funds will enhance liquidity, lower borrowing costs, and ultimately support the growth of the Indian economy. The increased global interest in the Indian market further solidifies India’s position as an attractive investment destination and highlights the trust placed by international investors in its growth trajectory. Overall, the ongoing investment by FPIs bodes well for the Indian debt market and the economy as a whole.
Foreign Portfolio Investment (FPI) involves an investor buying foreign financial assets. It involves an array of financial assets like fixed deposits, stocks, and mutual funds. All the investments are passively held by the investors. Investors who invest in foreign portfolios are known as Foreign Portfolio Investors.
A participatory note, commonly known as a P-note or PN, is an instrument issued by a registered foreign institutional investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).
Foreign portfolio investment (FPI) refers to the purchase of securities and other financial assets by investors from another country. Examples of foreign portfolio investments include stocks, bonds, mutual funds, exchange traded funds, American depositary receipts (ADRs), and global depositary receipts (GDRs).
Foreign portfolio investment (FPI) involves holding financial assets from a country outside of the investor's own. FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange traded funds.
Europacific Growth Fund, the largest foreign portfolio investor (FPI) in India was born seven years before liberalisation ushered foreign investment into Indian equity markets. Today, it holds $131 billion in assets under management; 6.4 per cent of that is invested in Indian equities.
Total FDI inflows in the country in the FY 2023-24 is $17.96 Bn and total FDI equity inflows stands at $11.54 Bn. Mauritius (26%), Singapore (23%), USA (9%), Netherland (7%) and Japan (6%) emerge as top 5 countries for FDI equity inflows into India FY 2023-24.
That allocation can be split among developed and emerging markets, depending on an individual investor's goals and risk tolerance. "In general, I recommend clients hold 20% of their assets in international investments," says Jay Zigmont, founder and CEO of Childfree Wealth in Mount Juliet, Tennessee.
The key difference between FPI and FII is their regulatory framework. FPI is subject to a less stringent registration process and regulatory oversight. There are lesser entry and exit barriers for FPI investors. This allows for more flexibility in the capital flows of FPI.
However, non-U.S. stocks may be attractive due to lower valuations, higher dividend yields and growth potential in select regions. Investors should consider such investments as an inexpensive way to hedge portfolios against a potential U.S. stock-market pullback.
For example, a political coup in a developing country may result in its stock market declining by 40%. Increased Transaction Costs: Investors typically pay more in commission and brokerage charges when they buy and sell international stocks, which reduces their overall returns.
FPI Disadvantages include Market volatility, short-term focus, lack of control, currency risk, and market distortions. The key difference between FDI & FPI is that FDI involves ownership and control with a long-term commitment, while FPI is about short-term financial gains with no control over the business.
As a general rule, foreign investors (i.e. non-U.S. citizens and residents) with no U.S. business are typically not obligated to file a U.S. tax return, including on income generated from U.S. capital gains on U.S. securities trades.
When Americans buy stocks or bonds from foreign-based companies, any investment income (interest, dividends) and capital gains are subject to U.S. income tax and taxes levied by the company's home country.
U.S. stock is a popular investment for U.S. citizens and foreigners alike. There is no citizenship requirement for owning U.S. stock and foreigners can easily access U.S. stock through U.S.-based brokers and international brokers.
Mauritius (24%), Singapore (23%), the U.S. (9%), the Netherlands (7%), and Japan (6%) emerged as the top five countries for FDI equity inflows into India during the period; whereas the services sector (finance, banking, insurance, non-fin/ business, outsourcing, r&d, courier, tech.
The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of ...
Foreign investment involves capital flows from one nation to another in exchange for significant ownership stakes in domestic companies or other assets. International commerce is trade between companies in different countries, or just trade between different countries.
FII stands for foreign institutional investor, which is a subset of FPI. FII refers to the investment made by foreign institutional investors in Indian securities. FII is a specific type of FPI that involves only institutional investors and not individual or small investors.
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