FIIs register a net inflow of Rs17,000 crore in Indian debt so far this year

Moneylife Digital Team 21 January 2014

In less than one month, in January, foreign institutional investors have invested heavily in Indian debt on the back of a stable currency and that policy rates will be left unchanged

Foreign investments have once again started to flow in to Indian debt investments. After six consecutive months of outflows, there were net foreign institutional investor (FII) debt inflows in December 2013. In December 2013, FIIs registered a net inflow or Rs5,500 crore in debt securities. Since the beginning of January 2014, the debt market segment has recorded a net inflow of over Rs17,000 crore from FIIs.

As we had mentioned in an earlier article (Read: Rupee Weakness: Its not just CAD, keep an eye on US 10-year yield), US yields have an impact of FII inlows in debt investments. US 10-year treasury yield had shot up by more than 100 basis points since the beginning of May to 2.70% in June, about the time the Fed hinted about its plan to reduce bond buying. The rising US yields, led to a selloff by FIIs of Indian debt. US yield went on to reach 3% by the end of December 2013. However, since the beginning of January, US Yields have fallen by nearly 20 basis points to 2.82% as on 17 January 2014. As seen in the chart, on 13 January 2014, US treasury yield declined to 2.83% and FIIs poured in over Rs5,000 crore in the Indian debt market.

According to Nomura Research, “While partly a product of seasonality (FII flows are usually strong at the beginning of the year), these flows are also likely due to the relatively stable exchange rate and expectations that the status quo will remain for policy rates because of lower inflation.”

The report further stated, “Strong FII debt inflows should help to finance the current account deficit in the near term. However, if inflation does not moderate much, as we expect, it could also prompt the return of higher interest rate expectations, which would increase the risk of net outflows returning.”

Over the six month period from June 2013 to November 2013, nearly Rs80,000 crore was pulled out by foreign investors. In June 2013 FIIs pulled out Rs22,000 crore from the debt market. This is a staggering amount, because as much as 12% of total FII investment in the Indian debt market flew out in a span of 21 days.

This came at a time when the current account deficit (CAD) was already precarious, having reached an all-time high of 6.7% of GDP at the end of 2012. India’s trade deficit too reached a seven-month high in May at $20.14 billion because of an almost 90% annual increase in gold and silver imports. These factors have together, compounded and exacerbated the volatility of the Indian rupee.