Indian stocks still best bet for FIIs, inflows top $13b
Oct 06 2013 , Mumbai
But debt market could spoil the story, wiping out $15b
Domestic Indian institutions have been net sellers worth $1.4 billion, according to data compiled by Deutsche Bank.
However, FIIs have kept away from the debt market, and withdrawn $6.05 billion from this segment, so far this year. With prospects of interest rates going up in the future, they are expected to pull out the remaining $15 billion in the Indian debt market.
Agam Gupta, managing director, fixed income, Standard Chartered Bank, said, “The outflows happened only after May when the unwinding talks about tapering by US Fed began. Foreign investors still have faith in the India growth story. But these flows are sticky and can flow out anytime.
Returns that equity investors got from India were one of the best in emerging markets. In the debt market, however, with yields in the US treasuries rising, there is hardly any mark-up for investments in India.
With yields continuing to rise, the debt markets are less attractive.”
FIIs in the Indian market mostly comprise large fixed income institutions and foreign banks, among others. Their hedging costs have moved up from 4-5 per cent earlier to 7 per cent on a fully hedged basis. Investments in Indian debt hardly give any interest differential compared with the developed economies.
The Deutsche Bank report suggests, “After posting three consecutive months of net outflow, FII flows into Indian equities turned positive ($2 billion) helping to recoup 50 per cent of the outflows witnessed in the aftermath of FOMC (Federal Open Market Committee)’s May testimony.”
UR Bhatt, managing director of Dalton Capital said, “India is the largest recipient of FII flows, with the total flows up to May being around $15 billion, but from June to August about $3.7 billion went out, and from September the trend is reversing. But the debt market investments continue to be negative, as the hedging costs have moved up. So, the US 10-year benchmark bond giving a return of 2.7 per cent is more attractive than Indian debt.
Fresh FII inflows into the equity market, inflows through the FCNR accounts and banks raising funds have also helped the rupee to appreciate.
The rupee recovered strongly on September 13, appreciating by 5 per cent (highest in past 12 months and first positive performance since April), as authorities moved into the overdrive to bring the rupee back to its received fair value, by announcing measures to attract foreign capital and deter imports of less essential commodities.
Postponement of the Fed’s QE tapering also helped the rupee consolidate gains. The rupee was among the best performing key EM currencies, second only to BRL. With INR appreciating strongly and stabilising in a tight band, investor sentiment should likely improve, the Deutsche Bank report said.