FIIs pump $18b into stocks, but exit debt big way

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Taper-wary overseas investors sell debt papers worth $10.5b

Foreign institutional investors (FIIs), which have pumped $18 billion into Indian stocks this calendar, are cutting their exposure to Indian debt in a big way.

FIIs are net sellers of $10.47 billion worth of secondary market debt paper. In the primary debt market they are still net buyers of $1.82 billion, data on the Securities and Exchange Board of India (Sebi) website show.

On a net basis in the primary and secondary debt, FIIs are net sellers of $8.66 billion so far this year.

Their withdrawal from Indian debt paper means net foreign inflows into Indian stocks and bonds total $9.4 billion this year, despite the high inflows into stocks.

Abhay Laijawala of Deutsche Bank said the FIIs were selling in the bond market on expectation of a rollback of the US stimulus beginning sometime soon. “Globally FIIs are withdrawing from bonds for the same reason,” he said.

When the US Federal Reserve first hinted in May at a rollback, foreign investors started exiting from both stocks and bonds in India, impacting even the currency market. The rupee along with other emerging market currencies fell sharply. The rupee, however, is now holding steady.

Between January and July-end FIIs had pulled out $3.22 billion from bonds and debt. In equities they had pulled out $1.05 billion in July. However, their investments in the year in equities were still positive at $12.44 billion.

Sonal Varma, India economist at Nomura, said the US tapering threat was the main reason for FIIs to pullout of the bond market. She also agreed that similar withdrawals were seen from bonds in other emerging market equities but not from Indian stocks.

“There is a general feeling that there will be an upside for Indian stocks and hence the big buying,” she told Financial Chronicle.

Are FIIs selling Indian bonds to buy Indian stocks? Laijawala of Deutsche Bank does not think so. He said foreign funds had a different focus.

So funds meant for bonds would not buy stocks and vice-versa. “It is not possible for foreign bond funds to sell and buy Indian stocks,” he explained.

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