Foreign Investment in Indian Debt Surges: A Boon for Bond Markets

In 2024, the Indian debt market has witnessed an unprecedented surge in foreign investment, marking a significant milestone as it reached 66% of the total foreign portfolio investment (FPI) recorded in the preceding year, all within the span of just 2.5 months. This surge, as revealed by data from the National Securities Depository Limited (NSDL), showcases a remarkable infusion of Rs 45,572 crore by FPIs into Indian debt, a substantial increase from the figures reported in 2023. Experts unanimously attribute this phenomenal surge to the series of announcements regarding the inclusion of Indian debt in global indices, which commenced in September 2024.

The impact of this influx has been nothing short of transformative. January saw an influx of Rs 19,837 crore, followed by a staggering Rs 22,419 crore in February, and an additional Rs 3,316 crore up to March 7th. Such staggering figures not only underscore the growing confidence of foreign investors in the Indian debt market but also signify a robust trend of sustained investment. The repercussions of this surge have reverberated across the market, most notably in the decline of yields on government securities by 10-15 basis points since the inclusion announcement.

A key factor contributing to this surge in FPIs' debt investment is the increased accessibility facilitated by initiatives like the Fully Accessible Route (FAR). The FAR allows non-resident investors to partake in Indian government securities without encountering any investment ceilings. Consequently, since the inclusion announcement, the FAR has witnessed an exponential surge of over 100%, further solidifying its role as a catalyst for foreign investment in Indian debt.

Moreover, the announcement of Indian debt's inclusion in prominent global indices such as the JP Morgan Emerging Market Index and Bloomberg Emerging Market Index has served as a significant catalyst. This inclusion not only enhances the visibility of Indian debt but also paves the way for increased participation from international investors. Market experts foresee sustained high inflows throughout the remainder of 2024 and into 2025, painting a positive outlook for the Indian bond markets.

The impact on yields has been palpable, with heightened demand from both domestic and foreign investors exerting downward pressure on the yield of government securities in recent months. Notably, the yield on the 10-year benchmark bond has witnessed a noteworthy decrease of around 10-15 basis points since the inclusion announcement. This downward trend in yields reflects the growing appetite for Indian debt among investors, fuelled by optimism surrounding its inclusion in global indices.

Looking ahead, money market experts anticipate continued robust inflows, driven by the inclusion of Indian bonds in global indices. This optimistic outlook underscores the potential for further growth and development in the Indian bond markets. As this trend unfolds, it becomes increasingly imperative for investors to stay abreast of the latest developments and insights into the world of Indian debt investment.

In conclusion, the surge in foreign investment in Indian debt represents a significant milestone for the Indian financial markets, signalling a newfound confidence among international investors. With the prospect of sustained inflows and a positive outlook for the bond markets, the stage is set for further growth and development in the Indian debt market landscape.