Foreign funds binge on Indian debt; FPIs net bought over $2 billion worth of Indian debt in Feb

Foreign investors are showing increased interest in Indian debt, anticipating significant inflows due to the country's inclusion in global bond indices such as those by JP Morgan and Bloomberg. This surge in foreign investment is expected to stabilize the Indian rupee, but analysts are not predicting immediate appreciation.

In February alone, foreign portfolio investors (FPIs) net bought over $2 billion worth of Indian debt, following a trend of rising investments since October when the inclusion in the JP Morgan global bond index was announced. This influx of foreign funds not only supports the bond market but also strengthens the rupee as foreign investors need to convert dollars to rupees to invest in Indian bonds.

While the inclusion in global bond indices is estimated to bring in $30-35 billion into India's debt market, analysts suggest that the actual amount may depend on the sentiment surrounding emerging markets at the time of inclusion. Nonetheless, these inflows are seen as beneficial for India's macroeconomic stability, particularly in managing the current account deficit and providing the Reserve Bank of India (RBI) with more control over forex reserves, especially in the event of oil price spikes.

Despite expectations of moderate inflows, analysts anticipate that the rupee will experience low volatility over the next 12 months, with the RBI likely intervening to maintain stability. However, there might be mild depreciation in the rupee if significant inflows occur, with the RBI potentially using its reserves to limit any appreciation.

Overall, while the influx of foreign funds into Indian debt is expected to support the country's macroeconomic position, analysts caution against expecting immediate rupee appreciation, citing potential drawbacks such as reduced export competitiveness in the long term.