FIIs continue to buy into India story, inject $25 bn into equities, debt in CY14

Written by Devangi Gandhi | Mumbai | Updated: Jul 25 2014, 13:05pm hrs
InvestmentFIIs have also been buying Indian bonds ? primarily gilts ? with just 41% of the quota for corporate debt of $51 billion having been utilised.
Foreign institutional investors (FIIs) have pumped in a combined $25 billion in stocks and bonds so far in 2014, strongly endorsing the countrys political stability and growth potential in a manner not seen before. FIIs have picked up $12 billion worth of equities while investing around $13 billion in debt; on Thursday the BSE Sensex soared to yet another lifetime high of 26,271.85 points.

Despite the rich valuations and only a moderate pick-up in earnings, the Street remains bullish on the Indian market.

Click here for graphBrokerage Credit Suisse, for instance, has acknowledged that after the sharp re-rating in the Indian market, several investors have turned uncomfortable citing Indias premium to other EMs (emerging markets). Nevertheless, it finds the comparison with other EMs, as a basket, inappropriate, arguing the expected recovery off the bottom for the other EMs is much more tepid than in India. Even if the pace of change driven by the new government disappoints consensus (as we expect), the market should still do well, it wrote in a report.

Meanwhile, Mark Mobius, executive chairman of Templeton Emerging Markets, said in a Bloomberg Television interview that Indian stocks wont rise much more in the near term and may start correcting after the initial euphoria. Still, there will be other opportunities to enter India and the countrys stocks have long-term upside, Mobius observed.

FIIs have also been buying Indian bonds primarily gilts with just 41% of the quota for corporate debt of $51 billion having been utilised. The on auction quota of $20 billion for gilts has been exhausted though the on tap quota of $10 billion remains largely unutilised.

In a move that could help bring down the yield on the benchmark bond by about 50 basis points, closer towards 8.25%, over the next seven to eight months by March from 8.7% now, the Reserve Bank of India on Wednesday hiked the limits for the limits on auction by$5 billion to $25 billion within the overall $30 billion limit for foreigners and the overall $81 billion FII debt limit.

The central bank simultaneously elongated the duration of the investments for FIIs to a minimum residual maturity although it refrained from imposing any lock in.

Higher FII inflows into G-secs will be automatically sterilised if they buy at primary auctions and reduce net RBI credit to the Centre, Indranil Sengupta, chief economist, Bank of America Merrill Lynch, wrote in a report, adding that the central bank was attempting to drive FIIs towards financing of the fiscal deficit by insisting on a minimum residual maturity of three years. The RBI had earlier barred FIIs from buying T-Bills.