Foreign institutional investors (FIIs) are selling bonds for the first time since April 2014, having pulled out $1.43 billion so far in May 2015, reports Bhavik Nair in Mumbai. FIIs had sold $1.85 billion in April last year but have since been loading up on debt, especially sovereign securities. In 2015, so far they have pumped in close to $6 billion into the bond market but the selling in May has pressured the currency somewhat; while the rupee was trading at 63.44 to the dollar at the start of the month, it had depreciated to 64.24 by May 7. On Friday, the currency closed at 63.52 to the dollar.
Brijen Puri, MD, head of markets at JPMorgan, says the FII outflows could be due to a combination of factors such as the sell-off in bonds globally, the rise in price of crude oil and uncertainty on rate cuts by the RBI.
Foreign bankers say the investment cycle not kicking off is something that FIIs seem to be keenly watching when deciding on their investment strategy. “If you are looking for one theme that is probably worrying the foreign investors, it would be the lack of growth, the as-yet stalled investment cycle and stressed corporate and banking balance sheets. Credit offtake remains at multiple year lows, capacity utilisation is tepid, as are corporate results,” said Ananth Narayan, regional head of financial markets, South Asia, at Standard Chartered.
FIIs can invest up to $25 billion in government bonds with long-term foreign investors like sovereign wealth funds, central banks and insurance companies being allowed to invest an additional $5 billion above the $25-billion cap.
Foreign investors had utilised the entire quota for gilts by August last year, indicating the attractiveness of Indian paper.
However, a part of the FII outflows seen in May this year was in government securities, according to Ajay Manglunia, senior vice-president, fixed income, Edelweiss Securities.
“This time about $500 million worth of gilts were auctioned whereas normally the quantum is about $100 million. This means that some of the outflow was of gilts and the rest of it was corporate bonds,” Manglunia observed.
According to the latest data from depositories, FIIs have invested close to $39 billion in corporate bonds, an 18.17% rise from the beginning of 2015. Foreign investors can invest up to $51 billion in corporate bonds. Market experts also believe that the recent outflow might only be a marginal adjustment and the medium-term outlook still remains constructive. With the RBI shifting towards formal inflation targeting, it has helped improve the sentiment of foreign investors towards the risk of inflation.