Foreign G-Sec selling halves, but oil and global yields pose risks

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Foreign portfolio investors (FPIs) sold ₹5,400 crore of government securities under the fully accessible route (FAR) in October, 49% less than in September, according to data from Clearing Corporation of India (CCIL).

Foreign portfolio investors (FPIs) sold ₹5,400 crore of government securities under the fully accessible route (FAR) in October, 49% less than in September, according to data from Clearing Corporation of India (CCIL). Their net equity sales declined 3% month-on-month to ₹34,843 crore, National Securities Depository (NSDL) data showed. Combined selling across FAR securities and equities fell 13% to ₹40,243 crore last month from ₹46,390 crore in September, offering some respite after sustained foreign outflows through much of the calendar year.

Debt inflows seen in June and July failed to sustain after Bloomberg deferred a decision on including Indian government bonds in its Global Aggregate Index.

Foreign portfolio investors reduced their selling of Indian government securities and equities in October compared to September. Despite this, high oil prices and global yields pose challenges for sustained portfolio inflows. Economists caution that the slowdown may not indicate a definitive change in foreign investment trends. Political dynamics in other emerging markets might influence foreign capital movement toward India.

FPIs had bought more than ₹50,000 crore of FAR securities during those two months, including a record ₹41,774 crore in June, before turning sellers in August.

Economists cautioned against interpreting the slowdown as a decisive turn in the foreign investment cycle, as global risk factors continue to influence flows into emerging markets. "Outflows have reduced and it's not as bad as it was a few months ago, but it's hard to say if the cycle is turning. Outflows are sporadic, and when they do happen it's a large chunk," said Dhiraj Nim, economist and foreign exchange strategist at ANZ Bank.

Political developments in other emerging markets could redirect some foreign capital towards India. "What's happening in some EMs politically could put India in a favourable position," Nim said. "Easing US yields and some wobble in AI investment are factors that are evolving. However, high oil prices are a big deterrent to inflows."

Foreign investors sold Brazilian equities and debt following the presidential election as they reassessed the country's fiscal outlook, according to Reuters.

Concerns are also growing over whether returns from AI will justify the substantial investments being made in data centres, chips and computing infrastructure. This has prompted some investors to consider markets that are less exposed to expensive AI-linked investments. "Some of the recent inflows appear to reflect the view of India as the 'anti-AI' trade, coupled with declines in global yields and flows associated with IPO activity," said Tanay Dalal, senior VP, economic research, at Axis Bank.