FIIs invested a massive $2.2 billion in domestic debt papers on Tuesday, even as equity markets bled with the exit of overseas investors. This is the highest ever single-day investment in debt paper in the country through stock markets. The annual limit for investment in government paper was raised to $5 billion in May.
While there was no word from Sebi to explain the sudden rush for debt paper, one merchant banker said it was a one-off purchase by FIIs to exercise their unutilised limits for investment in the markets, the deadline for which is end-September. Analysts like Indranil Pan, chief economist at Kotak Mahindra Bank, said it was also an opportunity for arbitrage at the cost of equity investments.
As a result, the yield on government papers went down considerably. But despite this, forex traders in the options market have hiked the premium on one-month implied volatility on the rupee, indicating they expect more swings in the value of the currency.
The rupee clawed back on Wednesday to close at 46.33/35 a dollar, off a high of 46.25, and 1.2% stronger than Tuesday?s close of 46.89/90 after its sharpest fall in a decade. The currency climbed after RBI raised interest rates on foreign currency deposits and said it would sell dollars. This makes RBI?s forthcoming release of its weekly forex reserves data crucial, as it would reveal the toll on the country?s reserves.
As of September 5, forex reserves had shrunk by over 7% to $288.811 billion, from $311.885 billion at the beginning of this fiscal. That pressure is expected to continue, said analysts, as FIIs continue to withdraw from the equities market. Sebi data shows FIIs have sold $307.50 in equity. FIIs have sold shares worth $7.7 billion more than they bought until September 11.
?With the developments in the US over the last three to four days, there?s a massive demand for dollars in the domestic market. In such a situation, exporters have been holding dollars while importers have been trying to snap them up. There was a huge demand-supply mismatch in the domestic currency market with virtually no supply of the dollar,? said PNB chief general manager Arun Kaul.
RBI?s decision to sell dollars to prop up the rupee brought back some confidence and exporters began hawking greenbacks on Wednesday, Kaul said. The central bank on Tuesday raised deposit rates on NRI funds by 50 basis points to attract capital inflows and prevent further depreciation in the currency. Current demand for dollars comes from oil firms and foreign banks, which have maintained pressure on the rupee.