It is largely about real rates

In the last 6 months since inflation shot up sharply, the real rates have slipped into the negative. During this period, the bond yields also dipped sharply due to a combination of lower repo rates and abundant liquidity in the system. With bond yields lower and inflation staying high, the real rates in India have been in the negative zone. This has dissuaded FPIs from investing in India. After all, why would an institutional investor pay to invest in a risky emerging market like India? That is precisely where China has scored brownie points over India. 

No progress on debt reforms

One of the magnets that attract FPIs to bonds is the initiative from the policy makers to push through reforms. India has lagged China in terms of the speed of opening up the debt markets and the freedom given to global investors to invest in the government securities. India also never issued sovereign bonds to global investors limiting the appetite that global investors have for Indian bonds. China has been aggressive on all these fronts and that is where many FPIs have preferred Chinese bonds. 

Absence of passive investors

Like in the case of equities, even debt investments globally are largely passive. That means; large global investors will be keen to invest in the debt paper of economies which are present in the global debt market indices. While China has a substantial presence in global bond indices, India is yet to make its presence felt. Indian policymakers have consistently tried to assure investors that Indian bonds will be available in global indices by early-2021, but that has to first become a reality. 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. Quite a chicken and egg story! 

Get over Polonius syndrome

India has traditionally suffered from the Polonius Syndrome, “Neither a borrower nor a lender be”. In 2019, India came up with the $5 billion sovereign bond plan but shelved it. It does not make sense to be so skeptical about debt when forex reserves are close to $580 billion. India should use this opportunity to go aggressive on debt market reforms. It can be a real virtuous cycle. As bonds get included in global indices, FPI flows come in and that encourages global appetite for Indian bonds. For infrastructure sector that is starved of long term funds, this could like the proverbial manna from heaven.