It is a well-known fact that FIIs sold in excess of Rs.125,000 crore in equity and debt in the month of March. However, post-Mar-20, the flows into equity have been more or less positive. However, FIIs continue to sell in the debt market. In fact, in the Jan-Jul 2020 period, FIIs sold Rs.108,000 crore of debt in the Indian markets. What exactly is driving the aggressive selling by FIIs in the debt market? It is not about FII limits at all because FIIs have not used up even 50% of their available limits in G-SECs and in corporate bonds. There are 3 factors driving debt selling by FIIs.
All about negative real rates
The real rate of return is what investors earn on their investment after inflation is factored in. Till one year back, Indian bonds offered real bond yields above 4% making them very attractive by global standards. However, over the last 1 year, the bond yields have fallen to below 5.8% and the inflation has shot up closer to 8%. As a result, the real return on bonds has become negative. It is interesting when you compare the real rates of Indian debt with other countries. Other than Turkey, India has one of the lowest real returns on debt in the world. Even mature economies like Japan, EU region, and Australia are now offering real rates of returns that are better than India. As a result, most of the risk-off flows into debt are moving away from India into a developed market, which offers better real yields on the debt.