Net FII debt outflows up since FOMC meet

FII net outflows have been about Rs 6015 cr, of which Rs 1499 cr have flown out in the first 12 trading sessions of this month

Net debt outflows from foreign institutional investors this month have nearly triples in the seven trading sessions since the US Federal Reserve’s decision to leave its third stimulus package intact. According to data from the Sebi website, net outflows in the debt segment stood at Rs 4516 crore since the September 18 press conference by the US Federal Reserve Chairman. This is three times the amount pumped in by them this month prior to the FOMC meet.

So far this month, FII net outflows have been about Rs 6015 crore, of which Rs 1499 crore have flown out in the first 12 trading sessions of this month.

On the other hand, during the same period equity has seen net inflows of Rs 6958 crore from foreign investors post the FOMC meeting. Net equity inflows prior to the FOMC meet stood at Rs 6269 crore.

Analysts said that FIIs were moving money from the debt market into equities as the outlook on the debt market had weakened due to currency depreciation and weakening growth prospects. Besides, foreign flows have a preference for Indian equity over debt.

“FII money has always preferred equity investments as returns are higher as compared to those of the debt market. While there is risk involved in equity investments, that risk is mitigated by investments into the debt market. Also, Indian debt markets do not have the required debt,” said G Chokkalingam, MD & CIO, Centrum Broking.

The US Federal Reserve Chairman, Ben Bernanke, had given indications earlier this year in May of a possible $10 billion reduction in the QE3, the $85 billion bond-buying programme of the US. However, Bernanke sprung a surprise on markets globally by deciding to leave the QE3 intact citing unstable US economic recovery as the reason. This led to a rally in global equity markets. The BSE Sensex rose by about 700 points after the announcement.

Analysts said that the inflows into equities had come mainly from global exchange-traded funds which have been pumping money into the equity markets. These funds had been holding back on investments in the absence of clarity regarding the future of the stimulus programme. However, they warned that this was hot money and could go out as fast as it had come in, rendering equity markets volatile.

Outflows from debt funds had been on the rise since July when the Reserve Bank of India imposed capital control measures to stem the fall in the rupee. This led to massive outflows from the bond market causing prices to fall and 10-year bond yield to shoot up as high as 8.4%. Bond yields have since gone up as high as 8.9%.

Rupee depreciation, high inflation and weak economic prospects have led to a drop in bond prices, said analysts.