FIIs pump $3b in debt, but go slow on equities

Tags: News

Experts say they’re awaiting stocks correction

The New Year is not even a month old, and foreign institutional investors (FIIs) have already bought Indian debt securities worth $3.188 billion, marking th­e­ir return to the bond mar­k­et here. They were net sel­l­ers of $8.82 billion worth of bonds in calendar 2013.

The bond buying contrasts with FIIs’ subdued presence in the equity market, Sebi data indicate.

FIIs were net buyers of equities worth $17.62 billion in 2013. So far this year they have been net buyers of equity worth only $441 million. In January last year, they were net buyers of $551 million of bonds and $4.06 billion of equity.

FII inflows into debt came after six months of steady outflows. “Partly a product of seasonality, these flows may also stem from the relatively stable exchange rate and expectations that the status quo in policy rates to continue because of lower inflation,” said Nomura’s Sonal Varma in a note.

She said the inflows should help finance the current account deficit in the near term. “However, if inflation does not moderate much, it could also prompt the return of higher interest rate expectations, which would increase the risk of net outflows returning,” she added.

Ever since the US Federal Reserve’s then chairman Ben Bernanke uttered “taper” in its policy meeting last May, FIIs pulled out money, especially from Indian bonds. But both the currency and debt markets have been stable since Raghuram Rajan took over as RBI governor in September.

Sudden outflows after the US Fed hinted at a slow withdrawal of the quantitative easing policy impacted nearly all emerging market currencies. The fear in October was that the rupee might go down to Rs 70 to a dollar.

However, the rupee has stabilised since then at Rs 61-62, bringing the Foreign Institutional Investors(FIIs) back to the debt market. The relatively smaller quantity of monthly tapering ($10 billion) also boosted inflows.

At one point last year the Foreign Institutional Investors withdrawal was $10.615 billion, but a reversal came in December and is continuing.

Equity market watchers find it surprising that FII fund flows into equity are rising slowly compared with that into debt. But they say it's only a matter of time before they go whole hog on Indian equities.

It’s too early to say that Foreign Institutional Investors are not bullish on equities, said Dinesh Thakkar, managing director of Angel Broking. "If you look at the past three years, FIIs ended up investing $15-20 billion in equities every year, he pointed out, adding "The trend will continue this year.

Alex Mathew, head of research of Geojit BNP Paribas Financial Services, said Foreign Institutional Investorss were going slow on Indian equities vis-a-vis bonds at the moment as the equity market is already at its peak.

"They are waiting on the sidelines for a correction. When a correction comes about, we would see more FII money flowing into equities than bonds," he said.

In January, Foreign Institutional Investorss have bought bonds worth $3.02 billion and another $167.60 million from the primary market. In comparison, they have bought $431.4 million worth of equity from the bourses and another $9.60 million from the primary market.

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