By Manish M Suvarna

Foreign portfolio investors (FPI) withdrew nearly $1.63 billion from debt instruments in the calendar year 2021, which is sharply lower compared with 2020. A majority of the money was withdrawn in December.

FPIs withdrew $1.63 billion in 2021, compared with $13.9 billion in 2020. In December 2021, FPIs pulled $1.7 billion into debt, according to the data shown.
As per market participants, most foreign investors have pulled their money from the emerging market after the outbreak of pandemic at the start of 2020, which forced most central banks to flush the system with liquidity and cut rates to support the economy, especially growth.

Foreign investors remained uncertain, and, hence, 2020 calendar year saw heavy withdrawal from debt. But the conditions started improving after the faster pace of vaccination drive conducted by various countries. This has boosted sentiments of foreign investors, but lower rates in their countries forced them to turn their interest towards an emerging market where returns are better.

Investment by foreign players remained volatile in 2021. While these investors were net buyers of Indian debt in some months, things got worse afterwards because of the resurgence of the coronavirus pandemic, uptick in inflation across the globe and other contributory factors.

In December, after the US Federal Reserve signalled tapering earlier than expected and rate hikes, the flows were impacted. “Given the US Federal Reserve is aiming for a faster withdrawal of monetary accommodation, there could be outflows from emerging markets. However, we may not see any significant FPI outflow from the Indian debt markets as much of the hot money has already gone out in the last four years. Currently, FPIs own very little of Indian bonds,” said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Bond dealers expect investment by foreign investors to improve in 2022, as there is a high probability of Indian debt getting included in the global bond index, which will attract substantial FPI inflows from global ETFs and other benchmark investors.

“FPI flows in 2022 as such is likely to be very healthy. We see that most of the work to get India getting included in global indices is almost done and the final hurdle will also get cleared after the Budget. That will naturally have a large flow coming to India,” said Ajay Manglunia, MD and head — institutional fixed income at JM Financial.