Global central banks increase their share of FII investments in India's debt markets

A stable currency, low volatility in bond yields, and a relatively high risk-adjusted return have prompted many global central banks to increase their investments in India's debt markets in the past three years. According to data compiled by ETIG, of the total FII investment in India's debt markets, the share of global central banks has increased to 15% in January 2015 from 2% three years ago.

FIIs hold nearly $60 billion (Rs 3,12,000 crore) in Indian debt market, with half the money flow coming in 2014. Interestingly, foreign central banks hold 1.81% share in the total outstanding FII investment in Indian equities. A key reason for increased investment by global central banks in Indian debts is the near zero yield in developed markets. Besides higher yields, developing markets like India are also offering higher risk-adjusted return.



According to banking circles, monetary authorities of Norway, Singapore, Malaysia, and Middle-East are among the most prominent ones investing in Indian debt. These central banks have to register with capital market regulator Sebi as foreign portfolio investors (FPI) in order to invest in Indian debt securities. For instance, Norway's central bank is registered as Norges Bank in the FPI category, according to the Sebi website.

According to a study by Official Monetary and Financial Institution Forum (OMFIF), an independent research and advisory group based in London, in recent years, central banks around the world have foregone between $200 billion and $250 billion in interest income as a result of the fall in bond yields in developed markets. This is causing them to look at other relatively ‘safer’ avenues with more risk- adjusted returns.

Pooma Kimis, director of markets and institution at OMFIF said, “A number of central banks has taken the decision to park their funds into emerging markets' debt segment, of which Indian debt is probably one of the more attractive products available.”



Shalin Shah, India economist at London-based Capital Economics, said, “Indian bond yield is at 7.5% compared with sub 2% yields in developed markets. India offers one of the compared with developing markets' currencies. Some experts consider that growing foreign central banks’ exposure is a clear reflection of increasing credit worthiness and makes a case for a rating upgrade. According to Madan Sabnavis, chief economist at the rating agency CARE, increasing global central banks’ investment in Indian debt shows that they perceive the Indian bond market is more safe and reliable and this could result in a rating upgrade.

Also, a stable currency lowers hedging cost, says Ajay Manglunia, senior vice-president, fixed income at Edelweiss Securities, a broker.