Foreign investors sell off domestic debt

Profit taking, concern over MAT prompt outflow

Foreign investors are on a selling spree of domestic debt paper because of profit taking and concerns relating to applicability of Minimum Alternate Tax (MAT).

As a result, in April, there has already been a net outflow to the tune of $180 million. In March, the net inflow was $953 million. April is the first month of this year in which there has been a net debt outflow.

Last year, there was a record inflows in debt, as a result of which the government bond limit was almost filled up and foreign investors had no option but to invest in corporate bonds, which are considered to be riskier.

“It is because of the current concern about MAT and the applicability of tax on foreign investors. Though it has been clarified in the Budget that it is not applicable for capital gains.

However, for interest income there is no such exemption provided. So while the tax rate of five per cent is applicable, it is possible that the 20 per cent MAT will be applied later. As a result, certain foreign investors have probably decided to reduce their exposure to limit their tax liability,” said R Sivakumar, head, fixed income and products, Axis Mutual Fund.

Sivakumar added there is also some amount of profit taking among these foreign portfolio investors (FPIs). Since the start of 2015, the Reserve Bank of India (RBI) had cut the repo rate or the rate at which banks borrow from the central bank by 50 basis points to 7.5 per cent, helping FPIs to book profits.

 

Minister of State for Finance Jayant Sinha said in New Delhi on Thursday clarificatory amendments to MAT rules are under consideration. The government is considering clarificatory amendments to the rules relating to MAT for the benefit of FPIs who have been battling tax demands worth Rs 40,000 crore.

The India Meteorological Department has predicted below normal rainfall this year due to which concerns have been building up on future rate cuts by the central bank.

“These foreign investors were expecting further rate cuts and going by the scenario of monsoon and particularly the late rains and impact on rabi crop has resulted in some pressure on inflation. If that be the case then definitely they (FPIs) will not be as bullish expectations about rate cuts as it used to be about three months ago,” said Ashutosh Khajuria, president (treasury), Federal Bank.

Later this year, the US Fed is expected to hike interest rate which would lead to outflow of funds from emerging markets and India may not be an exception. It is expected by experts that at that time FPIs outflows may increase.