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Foreign institutional investors are returning to the Indian debt market, after pulling out $14 billion between May and December 2013. Soon after the US Federal Reserve announced its intention to taper its stimulus package last May, foreign investors began selling Indian bonds as India's external condition looked precarious. This selloff led to the currency going into a free-fall. Between May and November, Between 21 May and 1 January, FIIs have been net sellers of Indian bonds. On 21 May, 2013, outstanding FII investment in Indian bonds hit a high of $38.52 billion, which fell to $24.95 billion on 1 January, 2014. Interestingly, with the currency stabilising and the government getting a grip on the recalcitrant current account deficit, foreign investor interest has been revived in Indian bonds. This is true for both government and corporate bonds.
After touching a low of $24.95 billion in January, net FII outstanding in the debt market has risen by $2 billion as fresh inflows have come into Indian bonds. FIIs claim that Indian debt has become attractive again as bond yields are high and the forward premia or hedging cost has also declined from highs it touched in August. Neeraj Gambhir, managing director and head of fixed income at Nomura, says: "It is now remunerative to invest in Indian bonds for long-term investors like asset managers, sovereign wealth funds and central banks. Over the last month or so, there has been a reversal in investor interest in the bond market. This is long-term money that is relatively more stable. Though hedging cost has come down, it continues to be a deterrent. If hedging costs were to come down further, we will see some more flows."
Demand is back not only for government bonds but also debt paper issued by Indian companies and banks. Bank of Baroda is the first Indian bank to raise a dollar debt of $750 million from global banks and fund managers. On Wednesday night, the bank's joint lead managers -- Barclays, Standard Chartered Bank and Citibank -- closed a bond issue of $750 million. The debt has been raised for five and a half years and is priced 325 basis points above the five-year US treasury implying an yield of 4.92%. The final order book attracted orders worth $4.4 billion from 300 foreign investors. Bankers say that this implies return of appetite for Indian paper and over the year many more banks will raise relatively cheaper foreign debt to bring down cost of funds.
FIIs are expected to continue to pump in money into Indian debt in the coming months. While it may be tough to see all the $14 billion return to Indian debt, some of this may definitely return to India. And if forward premia comes down further a lot more FII money may come into the Indian debt market.
