FII flows in debt may not pick up amid US Fed concerns

In July, the yield on the 10-year benchmark bond had dropped a meagre five basis points to 7.81% as of July 31

Inflows from foreign institutional investors (FIIs) are expected to be slow going forward with concerns on the timing of a rate hike by the US Federal Reserve and a lack of clarity on the re-alignment of the government securities limit. There were net outflows in May to the tune of Rs 7,973 crore and then in June there was a slight pick-up where FIIs were net buyers worth Rs 1,775 crore. But again in July they had turned net sellers worth Rs 417 crore.

Data from the Securities and Exchange Board of India (Sebi) show the net inflows by FIIs was Rs 23,068 crore in January, but in February it stood at Rs 13,422 crore and then it fell further in March and April to Rs 5,949 crore and Rs 3,612 crore respectively.

“There was a bit of uncertainty internationally. Besides, there were also concerns on the monsoon front. This was a time when policy makers were slightly hawkish,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

In July, the yield on the 10-year benchmark bond had dropped a meagre five basis points to 7.81 per cent as of July 31. The Reserve Bank of India (RBI) will review the monetary policy on Tuesday and the expectation is that the repo rate or the rate at which banks borrow from the central bank will be kept unchanged at 7.25 per cent. “Tomorrow's monetary policy will bring some clarity in the market. The market is also waiting for some clarity on FII's G-sec limit re-alignment,” Manglunia said.

The bond market believes that after three rate cuts of 25 basis points each time since the start of 2015, the scope for any further cuts is limited for RBI. The Street feels that the FII limit for G-secs should be fixed in rupee terms instead of dollar terms. This would provide more headroom for FII investment in G-secs.

The US Fed said last week that the economy and job market continue to strengthen, leaving the door open for a possible rate hike when policy makers meet again in September.

When the Fed starts raising interest rates, there are fears that there will be outflows from emerging markets like India.