Why are FPIs selling consistently in Indian bonds debt paper?

Foreign investors may be buyers in equities but they are certainly selling in the bond markets. More importantly, they appear to be reallocating these funds to buying bonds in other Asian markets.

In the month of May 2020, FPIs sold Indian bonds to the tune of $3.04 billion, as fears over the health of the banking system and higher fiscal deficit spooked investors.

Normally, bond investors tend to be wary of higher fiscal deficit as it leads to a spurt in bond yields and a consequent fall in bond prices. However, in the month of May 2020 FPIs bought $3.12 billion of bonds across markets like South Korea, Malaysia and Indonesia expecting a sharp South East Asian recovery.

The problems for India added up after by Moody’s downgraded India’s sovereign rating and also its outlook. Currently, all the 3 major rating agencies viz S&P, Moody’s and Fitch have put India just one notch above speculative grade. However, Moody’s is the only rating agency to also have a negative outlook, whereas Fitch and S&P have a stable outlook for India.

This downgrade leads to an automatic realignment of bond portfolios and other Asian economies are benefiting.