Why has debt market become the preferred destination for foreign investors? Analysts explain

The debt markets have lately become lucrative for Foreign Institutional investors (FIIs) as they have invested nearly Rs 2,100 crore in it against Rs 9,600 crore withdrawal from the Indian equities so far in February 2023. FIIs invested roughly Rs 3,500 crores in the debt market in January 2023.

The FIIs’ recent interest in the debt market is mainly due to valuation concerns of Indian markets, which are more expensive than other emerging and developed markets, several analysts said.

They added that the recession fear in developed economies as well as high-interest rates by central banks across the globe can also be the factors due to which FIIs are looking at debt markets with hope.

Also Read: Foreign investors register worst outflow in 7 months at Rs 28,852 cr in January 2023 – what lead his drag?

“FIIs and even large investors are more interested in cutting down on equity due to valuation concerns. Indian stock markets are still expensive in terms of valuations as compared to emerging and developed markets,” Shrikant Chouhan, Head Of Equity Research (Retail), Kotak Securities said.

At the same time, there are indications from all central bankers that high-interest rates will continue for a long time, which benefits debt market investors, Chouhan said in his comment.

Amar Ranu, Head - Investment products & Advisory, Anand Rathi Shares & Stock Brokers shares another reason why the debt market has become the preferred destination for FIIs and opines that it is because “earning projections have been on declining mode for some time.” 

Also Read: Sell-off continues: Foreign portfolio investors dump Rs 9,600 crore from Indian equities in February so far

Ranu added that debt returns have been on an upward trajectory due to interest rates going up and equity may remain flat or volatile this year, which is making a case for investment into debt.

The FIIs don’t see the debt market as long-term investment instruments mainly due to the lower rates of return as compared to equity markets.

“Debt may remain more lucrative than equity only for short periods of time because debt will not be able to match the equity returns over the medium to long term,” Joseph Thomas, Head of Research, Emkay Global Financial Services, said.

Thomas added, “Other markets are relatively cheaper compared to the domestic market. China is cheaper but the domestic market has always traded at a premium to China. In fact, the premium has come down with the recent corrections.”

According to Chouhan, “Gold can be another investment option but for that, we need confirmation signals that the recession is on the verge of coming. If major developed countries enter into a recessionary trend, then we can expect a fall in the dollar index and a rise in gold prices, which will help precious metals investors.”

“We are of the view, the current year is the year to invest in multiple asset classes, we cannot rely on any single asset class. However, if we have an investment horizon of 2 to 3 years, our allocation to equities should be higher," the analyst at Kotak Securities said in his comment.

According to Sunil Damania, Chief Investment officer, MarketsMojo, "It appears that FIIs have made a profit on the Indian equity market and that money has moved to some emerging markets."