The Hindu Business Line : FIIs pump $881 m into the debt market in 2006

The year 2006 witnessed a jump in FII investments in the debt market. According to the SEBI figures, Foreign Institutional Investors (FIIs) pumped $881.30 million into the debt market in 2006 compared with an outflow of $1.242 billion in 2005.

The widening of the US-India interest rate differential in 2006 sparked FII interest in the debt market. While the US interest rates remained stable during the calendar year, returns on Indian bonds grew.

Treasury Bills

"Bond yields were attractive this year and most FIIs were investing in one-year treasury bills where the returns were good. Besides, the rupee was stable and FIIs were making investments on an unhedged basis as well," said Mr G. Narayanan, Managing Director, Securities Trading Corporation of India.

When FIIs invest in the debt market, they hedge themselves in the forwards market. With premia in the forwards markets staying low for most of the year, a number of FIIs were not hedging themselves. "The interest rate on one-year treasury bills and one-year corporate bonds edged up and prompted FII buying. Since the rupee was bullish against the dollar, the arbitrage was higher," said a senior treasury official at a foreign bank.

Corporate Bonds

The interest rate on one-year treasury bills increased from 6.25 per cent early in the year to 7.25 per cent (as per the last auction cut-off). The interest rate on one-year corporate bonds went up from 8 per cent to 9.50 per cent.

FII inflows picked up from April this year, while November and December saw the maximum inflows at $176 million and $198.20 million, respectively.

This followed RBI's October credit policy, which said the existing FII limit of $2 billion on investment in Government securities would be enhanced to $2.6 billion by December 31, 2006, and to $3.2 billion by March 31, 2007.

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