FIIs keep off Indian debt with record sell-off amid coronavirus outbreak

According to market sources, FIIs have also sold Rs 8,000 crore-Rs 10,000 crore worth of debt securities in the shorter-tenure market in March.

The record selling by foreign institutional investors (FIIs) in domestic debt markets is unlikely to reverse in the near term, with experts attributing the net sell-off worth Rs 48,710 crore in 2019-20 to the coronavirus outbreak and global recessionary pressures, which are showing no signs of abating.

“FIIs have been heavily selling in debt markets because they are seeing investor redemption in offshore funds. Amid the spread of coronavirus, leveraged positions have come under pressure,” said Ajay Manglunia, managing director and head of fixed income, JM Financial.

According to the National Securities Depository data, available since 1992-93, FII selling never crossed the Rs 40,000-mark, except in 2018-19, when debt securities worth Rs 42,357 crore were sold.

FIIs are significant players in India’s debt markets, having assets under custody (AUCs) of Rs 4.15 trillion. These account for 11 per cent of AUCs as of February 29 this year.
 

In March, FIIs sold debt of Rs 60,376 crore, making it the largest-ever monthly sell-off by overseas investors (monthly data is available since January 2002).

 

 

“FII selling has been across emerging market debt due to a risk-off sentiment, given the conditions surrounding global financial markets. This is largely due to the Covid-19 outbreak and the news flow on the outbreak will be a key factor in how flows shape up,” said A Prasanna, head of research, ICICI Securities Primary Dealership.

According to the Washington-based Institute of International Finance, outflows from emerging market debt in March stood at $31 billion, which is the highest monthly outflow since the global financial crisis in October 2008.

The recent global fund manager survey by Bank of America Global Securities has showed that investor sentiment has collapsed due to a combination of linked factors, including the build-up of recessionary pressures, rising risks of debt defaults, price shocks on oil, and the coronavirus outbreak.

The intense selling pressure led to a spike in yields across segments of debt, given the shallow liquidity of the domestic markets.

The liquidity pressures created by FII selling prompted the Reserve Bank of India (RBI) to intervene with Rs 3.74 trillion liquidity enhancement for debt markets last week.
 

The shorter-tenure debt papers had seen a spike in yields of 100-150 basis points, leading to mark-to-market losses for investors exposed to them.

According to market sources, FIIs have also sold Rs 8,000-10,000 crore worth of debt securities in the shorter-tenure market in March.

Market participants said as and when the issues surrounding coronavirus and other related factors stabilised, flows could pick up sharply.

“Overseas investors have an appetite for Indian debt markets, given the higher yields, but the current market environment has been challenging,” said an analyst.