Fii Entry Into Unlisted Debt Unlikely To Prop Inflows

The decision to allow foreign institutional investors (FIIs) into unlisted debt securities is unlikely to result in large inflows in the short term. "

Overall it is a positive step as it gives FIIs one more investment avenue as they can participate in private placements of debt," said S K Mitra, managing director, Birla Global Finance.

"However, FIIs are known to like an exit route and liquidity, therefore it is not certain how enthusiastic they will be about this, especially at a time when the overall credit rating and the external scenario is negative," he added.

Market players feel that with international credit ratings keeping a close watch on India's credit rating and a sliding currency, it is unlikely that the this policy will result in any large inflows in the short term.

K R Bharat, managing director, CSFB Securities India termed it as a positive step in the medium term and said that this meant that the procedures have become simpler.

"Earlier we had to insist on companies to list their debt, in order for us to invest in the issue. Now that problem has been removed."

However, Bharat added that if the finance minister wanted to dramatically increase the inflow of FII money into debt, the budget should have removed the withholding tax on interest on debt.

"This is a major hurdle for investors buying debt in India and inflows would have increased manifold if the withholding tax of 10 per cent had been done away with, said Bharat.

Most market players echoed a similar sentiment saying that there is likely to be no immediate impact in terms of higher inflows. Indeed, debt inflows have been negative in recent months. Till May 25, there was a total outflow for the month of $165 million. Of this amount, $87 million was on the basis of debt outflows.