FII investment in debt seen picking up post-election outcome

Foreign Institutional Investors (FIIs) are seen coming back to debt papers if a stable government comes into power. After being net buyers for four straight months, these FIIs had turned net sellers in April as they were not permitted to invest in short-term securities like treasury bills (T-bills).

According to data from Securities and Exchange Board of India (SEBI) FIIs turned net sellers worth Rs 8,743 crore in April. On April 1 the Reserve Bank of India (RBI) had said in the first bi-monthly monetary policy that to encourage longer-term flows and reduce volatility, FII  investments in government securities will be permitted only in dated securities of maturity one year and above, and existing investment in T-bills will be allowed to taper off on maturity/sale.

“The fall in FII investments had happened on account of change in policy where FIIs were not permitted to invest in short-term investments. Now they have only two options, either to buy bonds or to get back their money. So may be part of the money they would have taken back. If a stable government comes into power these FIIs will come back to invest because right now the yields on government bonds are quite attractive. If a stable government comes into power there may be softening of interest rates,” said Ashutosh Khajuria, president (treasury), Federal Bank.

The Street hopes that National Democratic Alliance (NDA) will score a majority in the elections due to which the bond market would see a rally. The election outcome is expected on May 16.

FII Net Debt Investment
Date	Rs. Crore
Apr-13	7,119
May-13	2,575
Jun-13	-31,342
Jul-13	-12,651
Aug-13	-8,659
Sep-13	-7,898
Oct-13	-12,916
Nov-13	-4,917
Dec-13	5,323
Jan-14	12,356
Feb-14	15,871
Mar-14	7,263
Apr-14	-8,743
Source SEBI
Compiled by BS Research Bureau

“If NDA scores more seats that would be positive for the market. Rupee may be volatile in the short-term but it may recover over a period of time given the fact that we have robust foreign exchange reserves and Current Account Deficit (CAD) is already under control. On the whole the outlook for FII flows in debt is seen positive,” said Ramanathan K, executive director and chief investment officer, ING Mutual Fund.

According to Ramanathan, investing in long-term instruments depends on currency and interest rates because it is very difficult to completely hedge long-term bonds.

Meanwhile, the Consumer Price Index (CPI) inflation had inched up in March but RBI had said in April bi-monthly monetary policy that they are willing to look through transient increases in CPI inflation data. CPI inflation in March accelerated to 8.31% year-on-year from a 25-month low of 8.03% in February. The inflation numbers for April is expected next week.