The 2016 Macro: Foreign Investors Sell Highest Amount of Debt Ever. First Net Sell Since 2008!

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Call it Demonetization. Call it a Trump thing. Whatever it is, Foreign Portfolio Investors (FPIs) have sold over Rs. 40,000 cr. of debt investments in India in the last two months.

This is the highest sales ever in Debt. For the year, FPIs have sold over 43,000 cr. in debt. Of this, around 35,000 cr. is purely in Indian government bonds.

Equity remains a positive for the year, with a net positive investment of Rs. 25,000 cr. in the year. But it’s fallen a lot; FPIs had net bought Rs. 47,000 cr. of equity till October, but they sold Rs. 22,000 cr. in the last two months.

FPI Table FPI Investments Annual

Why? And How Does It Impact Us?

Cut the bullshit. Get to the real stuff.

  • Why should foreign investors buy Indian bonds at 6.5% when US bonds are available at 2.5%? That difference used to be a whopping 6% earlier (India at around 7%, US at around 1%)
  • And then, after demonetization India’s prospects don’t look all that great.
  • Plus, the RBI refused to cut rates. That was a surprise.
  • It impacts your gilt funds. And “income” funds. And “dynamic” funds. These funds have lost 2% or more.
  • Such funds will recover to “break even” levels in four to six months. Exiting early will cause you to get exit loads, which is a bummer – so the other choice is to wait it out.
  • Ultra-short-term and liquid funds won’t be so badly hit, and they yield around 7% to 8%. So moving money to such funds will recover a 2% loss in about three months or so.
  • Gilt funds are still positive for the year, so it’s not like a dead case.
  • Given that most exits are in government bonds, it’s not foreign investors are afraid of defaults. They are actually exiting the most secure rupee debt available. So it’s something else (rising yields in the US, falling yields in India)

Bonds are not risk free. And 2016 has been excellent for bonds in general. Just not that great right now to stay invested in longer term bonds.

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