FPIs snap 8-day selling streak with biggest Indian bond purchase since June 15

Foreign portfolio investors (FPIs) made their biggest single-day purchase of Indian government bonds since June 15 on Friday, snapping an eight-session selling streak, even as the interest rate differential between India and the US has narrowed significantly since the war in West Asia began.

FPIs net bought Indian government securities worth ₹48.88 billion through the Fully Accessible Route (FAR) on Friday, according to the latest data from the Clearing Corp. of India, as reported by Informist.

The purchases were largely concentrated in the five-year benchmark 6.36%, 2031 bond and the 6.54%, 2032 bond. FPIs bought ₹25.80 billion of the 2031 bond and ₹23.60 billion of the 2032 bond, the data showed.

FPI ownership of the 2031 bond rose sharply to 14.42% of its outstanding amount on Friday from 12.33% a day earlier.

Before Friday's buying, foreign investors had cumulatively net sold nearly ₹100 billion worth of Indian government bonds over eight sessions, according to Informist.

US-India yield gap narrows

The renewed FPI buying comes despite a sharp rise in US Treasury yields. The 10-year US Treasury yield was trading around 5% this week, its highest level since late 2023, while the yield has risen about 105 basis points since the war in West Asia began.

Over the same period, the yield on India's 10-year benchmark government bond has increased by around 41 basis points.

The narrowing yield differential generally reduces the relative attractiveness of emerging-market debt for foreign investors, as higher US yields can make safer US assets more appealing.

The purchases also come days after the US Federal Open Market Committee raised its federal funds target rate by 25 basis points.

Short-term bonds see buying

The FPI buying was notable because it was concentrated in shorter-duration government bonds, even as traders have been cautious about short-term gilts amid expectations of further flattening of the yield curve, Informist reported.

The spread between the 10-year benchmark 6.94%, 2036 bond and the 6.36%, 2031 bond narrowed to 30 basis points on Friday from 40 basis points on September 11.

Despite the broader pressure on government bonds, the 2031 paper outperformed other maturities on Friday. It ended 5 paise higher, while the 10-year benchmark bond declined 15 paise.

During market hours, traders attributed the outperformance of the 2031 bond to buying by foreign portfolio investors.