Why have global FPIs been selling bonds in India but buying bonds in China?

Actually, you would be surprised if you see the actual numbers. The gap between flows into Indian bonds and Chinese bonds is stark. In the last one year alone, foreign portfolio investors or FPIs sold Indian bonds worth $14 billion. Ironically, this comes in the same period when FPIs infused $120 billion into bonds by China government and companies.

One thing that most foreign investors look for is progress on debt market reforms; and that is where India has lagged China. In fact, India lagged China in terms of the speed of opening up the debt markets as well as the freedom given to global investors to invest in the government securities without too many constricting limits.

One of the best ways to introduce global investors to Indian paper is through sovereign bonds. However, India never issued sovereign bonds to global investors limiting the appetite. Even a small $5 billion bond plan was shelved. China has been aggressive on all these fronts and that is the reason many FPIs actually preferred Chinese debt.

There is the story of a vicious story here. For example, even debt investments globally are largely passive in nature. That means; large global investors like Vanguard and Blackrock will be keen to invest in debt paper present in the global debt market indices. China has substantial presence in global bond indices but India is yet to make its presence felt.

That could happen in mid-2021, but that is a lot of time lost. This is in a way an extension of the previous point wherein unless you reform and open up debt markets, you don’t get included in bond indices and don’t get passive bond flows. So it is like a vicious cycle. Unless the bonds are included in the indices, there are no passive flows and FPIs are limited.