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The risk-off trade seen among global investors in December resulted in flight of capital from Indian equities. However, foreign institutional investors (FIIs) continued to invest heavily in the debt market. Last month, FIIs resorted to heavy selling in the wake of a sharp drop in oil prices and turmoil in the Russian financial market.
However, the debt market managed to buck the trend. FIIs pumped $1.8 billion into the Indian market, even as they pulled out $161 million from the equities market, according to data provided by the Securities and Exchange Board of India. Indian government securities and corporate bonds were in huge demand in December, amid cooling-off of yields, experts said.
The debt market also saw a huge rally, owing to the cooling of inflation and expectations of an interest rate cut. The benchmark 10-year government bond came down from 8.16 per cent in end-November to 7.83 per cent by mid-December.
The demand for the government paper was so large that foreign investors ended up nearly exhausting their investment limits.
In November, FIIs had used 95 per cent of their $30-billion investment limit in government debt. By December, they had utilised nearly 99 per cent of the limit.
On the other hand, equity markets saw a four per cent correction in December. The FII selling figure in equities in December would have been higher, had it not been for the $1.1-billion stake sale in Infosys by its promoters, experts said. Even globally, equity funds witnessed huge outflows.
FII investment in the Indian debt market came even as they pulled out $2 billion from emerging market bonds.
"There are various factors which cast a positive outlook on Indian debt markets softening commodity prices, stable exchange rate, credible fiscal consolidation plan and moderation in rural wage growth," said Mirae Asset Global Investments in a note.
According to experts, FIIs are getting attracted towards Indian bonds as the yields here are attractive as compared with global yields. Stability in the domestic currency and improvement in the current account deficit and fiscal deficit also hold the key, experts said.
Most investors have started positioning themselves to benefit from the expected interest rate cut by the Reserve Bank of India (RBI). Arvind Sethi, managing director, TATA Asset Management, said, "We believe calendar year 2015 will be a year of transition, albeit a slower one but a positive one for both the economy and debt market. The year would see RBI initiate the long-awaited rate-cut process, while markets will be keen to see the reforms process gathering pace."
Sethi said the volatility in crude oil prices, currency and external geopolitical risks could affect the debt market. For the entire year, FIIs invested $42 billion in the Indian market, $26 billion in debt and $16 billion in equities.
According to some experts, FII investment in India could halve in the coming year, as investments from West Asia are likely to take a hit due to the crash in crude oil prices.
FIIs also have room for investment only in the corporate bond market. Unless the government increases their FII investment limit in government bonds, there is little room for fresh investments. India allows FII investment of up to $81 billion, of which $30 billion is in government debt and the remaining in corporate debt.
Currently, less than 60 per cent of the investment limit in the corporate debt market is used by foreign investors.
