Overseas investors have poured in a staggering ₹19,772 crore ($3.35 billion) into the Indian debt market in May, the highest monthly inflow in about two-and-a-half years, emboldened by hopes of economic recovery after the Narendra Modi-led BJP stormed to power at the Centre.

The net inflow last month came after foreign institutional investors (FIIs) had pulled out a net amount of about ₹9,200 crore in April.

According to market experts, FIIs have pumped in huge investments in the Indian debt market on hopes that the new Government will take steps to revive the economy and a favourable interest rate scenario.

According to data compiled by capital markets regulator SEBI, FIIs were gross buyers of debt securities worth ₹40,478 crore in May, while they sold bonds to the tune of ₹20,706 crore during the same time. This translates to a net inflow of ₹19,772 crore ($3.35 billion) for the month.

This was the highest monthly net inflow since December 2011, when FIIs had made a net investment of ₹21,774 crore in the debt market.

“...we believe that interest rates in such an environment could remain stable with a marginally downward bias. The current 10-year Government security benchmark, which is trading at 8.6 per cent, could gradually edge lower in the coming weeks, creating potential capital gains for investors,” said Lakshmi Iyer, Chief Investor Officer (Debt) & Head Products, Kotak MF.

FIIs, who were net buyers in the debt market for four consecutive months, turned net sellers in April after they were restrained from investing in short-term securities such as treasury bills.

The strong inflows in recent months have taken the net investment by FIIs to ₹47,000 crore ($7.4 billion) in Indian debt market so far this year.

“Strategically, we remain pretty comfortable with our bullish rates view and continue to look for opportunities to add to outright receive swaps or long bond positions,” wrote Vivek Rajpal and Prashant Pande of Asia rates strategy team of financial services firm Nomura in a report.

Currently, there are over 1,700 registered FIIs in the country along with 6,450 sub-accounts.

(This article was published on June 8, 2014)
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