After a surge in inflows from foreign institutional investors (FIIs) in the equity market, it is now the turn of the Indian debt market to witness FII investment. The total FII investment in the Indian debt market has already crossed the Rs 20,000-crore-mark in 2010, around four times the figure of Rs 4,563 crore during the calendar year 2009. Inflows stood at Rs 7,972 crore so far during March alone, taking the total figure for the year till date to a whopping Rs 20,031 crore.
Currently, FII investments in the corporate bonds are capped at $15 billion and the cap for government debt is $5 billion. ?FIIs are mostly investing in short-term debt maturing in one or two years. The overall yield for investors is attractive at between 6.5% and 7.5%,? said Arvind Sampath, director (fixed-income trading), Standard Chartered Bank.
According to a dealer with a foreign bank, FII investments have mostly come in through the corporate bond route, the only segment which offers arbitrage. ?Short-term forward rates were at 2.5% offshore. Even if one borrows at Libor plus 100 basis points and adds the hedging cost, the cost comes to around 4%. For one-year triple A asset, the yield is 6.5% in India; so the arbitrage available is 2.5%,? he said on condition of anonymity.
Experts feel that the global sentiment has improved in 2010 compared with 2008 and 2009. What is more, there is more liquidity and foreign funds are prepared to take greater risks. ?Liquidity is chasing Asia, particularly India and China. This is supported by the good economic story and robust growth data in India,? said Sampath, adding that the proactive step taken by the Reserve Bank to raise interest rates to rein in inflation is also a positive development.
Akin to the debt market, the equity market has also witnessed massive inflows ? FIIs have been net buyers of equities worth Rs 18,969 crore in the year till date. In 2009, they pumped in Rs 84,262 crore.
Some experts feel that the FII inflows in the debt market are opportunistic and will vary depending on the arbitrage opportunities. However, others are more bullish. ?Surely for the first half, inflows will remain positive as long as the growth story remains intact,? said Sampath of Standard Chartered Bank.