After turning net sellers of Indian paper in May, for the first time since April last year, foreign institutional investors (FIIs) emerged net buyer of corporate and government bonds in June.
While FIIs were net buyers of Indian debt in June at $277.70 million, they were net sellers at $1.287 billion in May due to a global rout in the bond markets.
A bulk of inflows in June happened when foreign investors reportedly infused more than $1 billion dollars on a single day when Vodafone had come out with its rupee bond issue. The fact that the net positive amount for June was still at $277.70 million, indicates there had been sell-offs too.
In July, foreign investors have so far bought $79.65 million worth of debt securities as per data from depositories till Wednesday.
Capital inflows into the most attractive government securities are limited because by August 2014, FIIs had fully utilised their investment limit that stands at $30 billion. Intermittently, limits get freed owing to redemptions or sale of bonds to domestic investors. As and when these investment limits get free, an auction is conducted for FIIs to bid for these limits.
As of July 8, FIIs have utilised 99.71% of their investment limit in government debt securities while having used 77.31% of their $51 billion investment cap in corporate bonds.
Ananth Narayan, regional head of financial markets, South Asia at Standard Chartered, believes foreign investors continue to watch for any possible hike in their investment limits in the government debt.
“While current global uncertainty would impact capital flows, India continues to be a relatively preferred destination for debt inflows, given stable macros, currency, and relatively high yields. Global investors await opening up of FII limits into govt debt,” Narayan said.
Meanwhile, there has been speculation of a possible hike in the FII investment limit in Indian debt and converting the cap to a rupee-denominated against the dollar-denominated cap that is under current practice. A DBS report said that by shifting to a rupee-denominated cap, the foreign portfolio investment limit is likely to rise by more than 25% as the existing quota was calculated keeping rupee-dollar exchange rate at 49.80.
“There was no mention of a timeline. Technical aspects need to be worked out, especially the exact rupee level at which this conversion will take place,” it said.
Year-to-date, FIIs have pumped in close to $6.5 billion so far, which is nearly half the amount of inflows seen in the same period in 2014.
Abhiroop Mukherjee, associate vice-president and fund manager-fixed income at Motilal Oswal AMC, says FII inflows into the debt segment this year have been comparatively sluggish compared with last year when foreign investors had pumped in close to $11.5 billion YTD.
“This is due to external factors like Greek crisis and rate hike fear in the US and little chances of rate cut by RBI in the near future,” Mukherjee said, adding multiple factors would decide how the flows would pan out.
“Going forward, the foreign flows into debt will depend on factors like expectations of rate hike in the US and how the monsoon and other macro-economic factors pan out on the domestic front that will give an indication on the interest rate trajectory,” he said.