The Hindu Business Line : FIIs move to debt market as equities turn unattractive

Mumbai, June 30 Foreign institutional investors’ (FIIs) participation in the domestic debt market is on the rise, thanks to the high interest rate differential that exists in comparison with the overseas interest rate regime, especially in the US where the Federal Reserve has cut rates substantially in the past 9-10 months.

After the RBI recently raised the limit for the FIIs in the Government Securities from $3.2 billion to $5 billion, the FIIs are rushing in to buy Government paper as evident from the recent response.

Earlier this month, the entire enhanced limit for the Government securities for the FIIs was exhausted within a short span of time after the regulatory approvals came in.

The FIIs have invested $3.865 billion so far in the debt market as of June 27, 2008.

The FIIs investments were just $2.298 billion in debt at the close of 2007.

“It would be useful if there was a little more room for more professional players to come in the fixed income market and by increasing the limit you will see international players participating in the fixed income market,” said Ms Ashu Suyash, Managing Director & Country Head-India, Fidelity International.

Total equity exposure of the FIIs has come down to $60.20 billion as on June 27 as compared with $66.3 billion as on December 31, 2007.

Even this FIIs’ investment appears bloated in value as the dollar has appreciated against Indian rupee in the recent past.

In a complete reversal of trends this year so far the FIIs have sold equities worth around Rs 24,719 crore ($ 6.12 billion).

The Sensex, meanwhile, has declined 34.92 per cent from its January high of 21,206 points.

Last year till June 30, the FIIs had made net investment in equities worth $4.34 billion and the second half of the year it was almost a deluge with the US Federal Reserves’ measures to bring down the interest rate.

Total investment in 2007 touched $17.23 billion, which was instrumental for the bull run in the market.

Sharp selling

FIIs selling has been sharp in the current month of June, more than Rs 10,095 crore has been the outflow as per the SEBI data till June 27 and FIIs were net sellers (Rs208.66 crore) according to provisional figures for Monday.

However FIIs are positive about equities as an asset class in the long-term and are waiting for the right opportunity.

“I think we are just in the middle of a cycle right now, we are seeing an end to the cyclical bull market, we are seeing market adjust quite naturally to that… once that adjustment takes place we think the underlying economic growth of the world economy will be positive,” said Mr Robert Higginbotham, President, Fidelity International, who was here on a visit.

The total number of FIIs registered with SEBI has gone up to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back, as more and more sub-accounts have registered as FIIs.

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