Institutional players prefer investing in debt

The foreign institutional investors (FIIs) and mutual funds (MFs) have been major investors in debt, primarily treasury bills and short-term corporate papers including commercial papers and certificate of deposits.

The equity market has remained subdued during the fortnight starting August 1, according to the data released by the Securities and Exchange Board of India (SEBI). The Sensex gained merely 67 points, from 14,656 points on August 1 to 14,725 points on August 14.

The foreign institutional investors (FIIs) invested Rs 561 crore in the debt market during the period, while withdrawing Rs 7.2 crore from the equity market. The mutual funds were net buyers in debt instruments, to the tune of Rs 3477 crore, while selling around Rs 822 crore in the equity market.
 

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	FII net investment

MF net investment

DateDebtEquityDebtEquity Aug 1, '080-342.2782.9226.4 Aug 4, '08-9.5-400.61,036.40-304.0 Aug 5, '089.464.1507.1196.8 Aug 6, '0812.51,628.60-550.7-383.3 Aug 7, '08-75.9-19.01,262.30-22.0 Aug 8, '0897.579.1-256.9-131.3 Aug 11, '08269.8409.7189.4454.8 Aug 12, '08354.5-384.351.9-266.5 Aug 13, '080-646.3-29.7-174.6 Aug 14, '08-97.2-396.3485.0-418.8 Total561.1-7.23,477.7-822.5 Figures in Rs crore

During the corresponding period in 2007, the FIIs were net sellers in both the equity and debt markets. The sell-off was primarily due to reverse yen carry trade following the appreciation of the Japanese currency. On the other hand, the mutual funds were buyers in the equity as well as debt markets.

Dealers explained that institutional investors opted for treasury bills as there was no need for valuations and provisioning for adverse market movements. CPs (15 day to one year paper for companies to raise money) and CDs (15 day to one year paper for banks to raise money), on the other hand, offer good returns.

Liquidity is under strain due to RBI’s tight monetary policy to contain inflation. The yield curve (the graphical representation of interest rates corresponding to their maturity) is either inverted or flat on most occassions. Therefore it makes sense to buy T-bills as no market valuation is needed, said a dealer. The yields on the 91 day T-bill and 10-year paper is 9.05-9.10 per cent on most days.

Dealers added, companies prefer to pay money through short-term instruments such as CDs and CPs as it is better to pay above 10-11 per cent for a term of three months to one year rather than offering higher rates for five years or 10 years.

Most banks and mutual funds are reluctant to sell their corporate bond holdings, given the attractive coupon rates.