FII Investment In Debt Market Jumps On Arbitrage Opportunity

Mumbai, May 21: | Updated: May 22 2003, 05:30am hrs
Lucrative arbitrage opportunity between overseas and Indian debt markets has led to a sharp rise in investment by foreign institutional investors (FIIs) in Indian debt papers.

The combined FII investment in the debt market in the first five months of the last three years till 2002 was Rs 524 crore. As against this, FII investment in the first three weeks of May 2003 was Rs 1,478 crore. Not only that, on Monday the net FII investment stood at Rs 802 crore, a record since FIIs were allowed to invest in the Indian markets.

In the first five months of 2000, FII investment in debt stood at Rs 144.30 crore. FIIs were net sellers to the tune of Rs 181.90 crore in the first five months in 2001, while they were buyers to the tune of Rs 561.80 crore in 2002 during the same period. Mr Nilesh Shah, chief investment officer, Templeton AMC, said: The money is basically used for arbitrage purpose. FIIs can borrow at the six-month London inter-bank overnight rate (Libor) of 1.25 per cent and invest in treasury bills (91-days or 364-days). T-bills are currently trading at 4.5-4.6 per cent.

The demand for T-bills has pushed the T-bills rate below the repo rate of 5 per cent (or the rate at which RBI borrows). Currently, the overnight call money rate is 5 per cent, which is higher as compared with the T-bill rate.

However, Mr Shah said: Its not the Indian rupee strengthening against the dollar but the weakening of US dollar against global currencies that has pushed the rupee to a two-year high. As compared with the Indian rupee, which appreciated about three per cent to the dollar in the last one year, the Euro has gained about 23 per cent against dollar during the same period.

Mr Shah said: Foreign investment in the debt market is capped at $1.5 billion, and therefore, it wont make any significant impact on the short-term money rates.

He said: About $800 million has already been invested in the debt papers and the remaining $700 million has been distributed among different players. With this, only about $100 to $300 million is left overall which can be invested in debt instruments. This will hardly make any difference, he added.

However, in terms of total investments during a year, 2001 saw a record FII inflow of about Rs 13,000 crore. In the first five months of 2001, FIIs invested Rs 10,471 crore in Indian markets, out of which Rs 10,653 crore were in the equity market. During the same period, FIIs were net sellers in the debt market.

In 2000, total FII investment in both the debt and equity markets stood at Rs 7,320 crore, out of which Rs 7,175 crore went into equity and Rs 144 into debt.