FIIs bidding adieu to equities to embrace debt

By SiliconIndia   |   Thursday, 27 December 2007, 08:00 Hrs
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Mumbai: Foreign institutional investors (FIIs) seem to be favouring Indian debt. In December alone, FIIs have invested double the amount of their equity investments into debt securities in India, reported The Economic Times.

While FIIs have sold stocks worth more than $7.14 billion on stock exchanges, they have sold debt securities only to the tune of $238.2 million in December, indicate figures available with Securities Exchange Board of India (SEBI). Similarly, FIIs have invested almost $700 million in the Indian debt market, compared with a much lower figure of $352.6 million in equities.

Treasury managers at multinational banks and bond houses say that many of the FIIs are actually purchasing bonds and then booking dollars in the forward market. Traders believe that the rupee is unlikely to strengthen versus the dollar in the near-term, given the strong intervention from the Reserve Bank of India (RBI) and the lower premium payable on long-term forward contracts.

According to a fixed income head at a multinational bank, FIIs end up pocketing spreads of nearly 280 basis points through such deals. A senior trader at a leading bond house said, "There could be two ways in which FIIs could be using the swap route. One would be to invest in bonds here and enter into a pay-in swap overseas at a fixed price of 5 percent. Thus, while they manage to procure funds at 5 percent levels, they could invest them in one-year government bonds, offering a yield of 7.7 percent. This allows them to pocket a net return of 270 basis points. The other way could be entering into a swap deal in the overseas market and unwinding it back here, which gives them an access to funds required to invest in the Indian market."

Following the hike in the cash reserve ratio which RBI announced in late October, and the recent outflows on account of the advance tax payments, the money market in India is ridden with a severe crunch in liquidity conditions. This has pushed up yields on the short-tenure bonds. Consequently, it has been noted that FIIs have shown a greater inclination towards bonds with a shorter tenure.

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