FIIs pulling out of debt market

The shrinking interest rate gap between the US and India has resulted in foreign institutional investors (FIIs) investments in the Indian debt market to drop sharply. FII investments in debt instruments has fallen by 57.68 per cent since the beginning of November.

FII investments in debt instruments were down from $1,143.20 million at the end of October to $660.50 million by the end of November and to $483.80 as on December 28.

Dealers said the withdrawal of FIIs from the debt market began in October, when the returns for FIIs in the US and in India became almost the same.

FII selling debt investments gained momentum in November and December as the US Federal Reserve carried on with the 0.25 basis points increase in its overnight rate. FIIs are net sellers of $1,203.70 million of debt instruments in the whole of 2005 so far.

Almost all of this net selling ($1,054.40 million) happened since July 2005. "FIIs could earn returns of 50-75 basis points on a fully hedged basis till the US Fed rate was 3.00 per cent (in July 2005). After the US Fed rate touched 3.75 in October and as the dollar started gaining against other global currencies, FIIs reviewed their Indian debt investments and started selling," said a senior official with a foreign bank, which has a large portfolio of FII investments in the country.

The US Federal Reserve raised the overnight rate for the 13th time earlier this month by another 25 basis points to 4.25 per cent. FIIs are allowed to invest upto $1.75 billion in government securities and treasury bills and another upto $500 million in corporate debt.

The highest investment by FIIs in debt was in March 2005 at $1,798.60 million. The fall in FII debt investments in 2005 so far is over 71 per cent. FII debt investments at the beginning of 2005 were $1,687.40 million.

The official said FIIs will sell most of their remaining debt investments and whatever remains will be to just park liquid cash.

Dealers said the debt market is a completely different story from the equity market.

The equity market is booming and any volatility always brings with it a chance to earn greater returns.