Debt market proves more attractive than equities for FIIs in 2011

Foreign investment in the country’s debt market stands at nearly Rs 15,000 crore in the current year so far, but overseas inflows into the stock market seem to have reached saturation point for the time being.

Analysts believe overseas investors are increasing their focus on the debt market due to factors such as rising inflation and the high interest rate regime prevailing in the country.

“Higher interest rates and soaring food prices are making foreign institutional investors (FIIs) allocate more funds to the debt market, instead of equities,” CNI Research Head Kishor Ostwal said.

So far this year, FIIs have made a net investment of Rs 14,969 crore in the debt market, whereas they have pulled out Rs 804.20 crore from the equities market till now, according to information available with market regulator Sebi.

“Crude oil prices, inflation and global factors such as the European debt crisis are taking the centrestage and movement of foreign fund houses would depend on these factors,” SMC Capital Equity Head Jagannadham Thunuguntla said.

He further said the current emphasis on the debt market was a temporary phenomenon and it generally happens in a weak market.

Meanwhile, the Bombay Stock Exchange Sensitive Index, or Sensex, has fallen by 13 per cent so far in 2011 to close at 17,870.53 in the last trading session.

FII inflows have beem slow so far this year, in sharp contrast to the trend in the previous year, when robust inflows of foreign funds helped the Indian stock markets sustain momentum, even when the global economy was under pressure.

The number of FIIs registered with Sebi marginally increased from 1,718 as of December 31, 2010, to 1,721 till June 6, 2011. Besides, the number of registered sub-accounts has climbed from 5,503 in December 31, 2010, to 5,879 sub-accounts.

In 2010, foreign investors purchased stocks and bonds worth Rs 10 lakh crore, a record high for a year. During the same period, FIIs sold shares and bonds worth Rs 7,80,000 crore, which translated into a record net investment of over Rs 1.75 lakh crore for the year.