India is witnessing sizable surge in FIIs debt investments; here’s why

Lakshmi Iyer

Kotak Mutual Fund

The foreign institutional investors (FIIs) have pumped in around US$ 29 bn into India since the beginning of 2017. Of this, around $20bn has been into India Fixed income. In CY 2016, the FIIs were actually net sellers in Fixed Income (~ $4bn).

Thus in comparison, we are witnessing a sizeable surge in debt investments into India. Truth be told, Indian sovereign debt has been topmost among the attractive avenues available for FIIs. But, the attraction of Indian debt for FIIs has increased much more in the recent past.

It’s not surprising frankly. India today has one of the highest real interest rates in the world. With CPI inflation at around 1.54 percent, and with 10-year benchmark gilt at around 6.46%, the real interest rate is too attractive to be ignored.

To top that, the inflation trajectory is likely to continue to remain below the tolerance threshold of the RBI’s inflation projection for FY18.

In this scenario, the possibility of around 25-50 bps rate cut increasingly becomes likely in over the course of next 12 months or so.

Thus, an investor would not only capture a high carry yield at these levels, but the rate cut may also provide a possibility of a capital gain from a long term perspective.

This outlook becomes more attractive for an FII when we look at the fact that the INR has performed strongly against the dollar in the last 1 year. Thus, for an FII, even unhedged exposure in Indian debt would likely bring the double benefit of a gain from currency as well as from the Indian debt.

The INR outlook also suggests that the domestic currency is likely to remain on a stable ground in the medium term. In absence of any supply shock from commodity prices, and with crude prices trading range bound, Indian balance of payment position could maintain strength. Thus, for FIIs, India remains a strong investment destination.

The political outlook of India is also stable with respect to most other emerging economies. So India scores even on this account. Therefore, it is no surprise that we are seeing such an increase in FII allocation into Indian debt.

The accumulation of these strong macroeconomic fundamentals on one hand, and the near zero yield level (even negative) at other, in the developed economies, India has become the prime destination for the ‘Carry Trade’.

From Indian retail investors view point, Indian fixed income funds remain an attractive option from a debt allocation perspective. There are a plethora of options to choose from.

Those unwilling to ride the interest rate curve volatility could look at investing in corporate bond based credit accrual funds to capture high yields with relatively lower volatility.

It is indeed time to capture the high carry yields available across India fixed income – both on sovereign as also corporate bond side. This is especially at a time when the Indian banking system is comfortable on liquidity and there aren’t too many anticipated shocks emanating from Indian macro.

Global macro factors, of course, need to be scanned thru in greater detail given the ever changing guidance from key world economies.

Disclaimer: The author is Chief Investment Officer-Debt and Head-Products at Kotak Mutual Fund. The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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