Fii Inflows In Debt Segment Set To Surge

The market is showing interesting signs of maturity. For the first time, the stock exchanges are reacting to interest rate changes.

Massive inflows are expected from foreign institutional investors into the bond market with the Securities & Exchange Board of India clearing a whopping $1.17 billion of dedicated FII debt funds in 1996-97 and $490 m worth of funds already in the new fiscal.

The market regulator has also seen further FII interest in launching another $500m of debt funds over the next few months, which means the inflows themselves were expected to pour in now. Sebis interaction with FIIs has also shown that they are going ahead with dematerialising their holdings of stocks aggressively.

 

In an exclusive interview with Business Standard, Pratip Kar, executive director of Sebi, said: The market is showing interesting signs of maturity. For the first time, the stock exchanges are reacting to interest rate changes.

Kar explained that the money markets and the stock markets were earlier totally divorced, but now interlinkages between them, a normal feature in developed markets, were developing. Financial institutions and banks are cutting their prime lending rates. This is what will trigger an active bond market, Kar said, adding that the activity will be heightened with the entry of money market mutual funds and FII trading in government securities.

He said equity investments by FIIs were not too hectic in April, following the political uncertainty, but the debt market was generating considerable activity on the FII front. Cumulative net investments by FIIs so far have totalled $7.76 billion, and after the initial hiccups in April, the first five days of May have seen net investments totalling $23 million. The net inflows in April totalled $147.8 million, down from $170 m in March.

On the registration of FIIs, Kar said the Sebi-Reserve Bank committee which clears pending registrations had met three to four times. There has been no opportunity to discuss pending cases, since no cases were pending. This also shows the effectiveness of the exercise, Kar said, adding that the FII application from the Japanese major Yasuda Trust Bank was cleared in three days flat. He said the registration process itself would remain so long as the policy defined institutional investors as a separate category. Once we make it free for all categories, after full convertibility, maybe the need for registration will go.

Kar said following a clarification from the Securities Exchange Commission of the US on the status of National Securities Depository Ltd, a number of US FIIs were going ahead with plans of dematerialising their stocks.

Kar also spoke on a host of other issues concerning his departments.

On Unit Trust of Indias restructuring, he said three asset management committees had been formed by UTI. It is an important step, but may not be the most satisfactory. We will see how it works and take things forward.

Kar said a very healthy sign has been noticed in the mutual funds area, with as many as 36 new schemes being cleared by Sebi between January and April. This is very significant, since 32 schemes were launched in 1996-97, as opposed to 30 in 1995-96.

The mutual funds industry is definitely showing some signs of revival, Kar pointed out, adding many funds were launching fixed income schemes and suiting their products to compete with financial institutions. Some funds have had a very good record of funds mobilisation. Overall, there is an optimism in the mutual funds industry.

Kar said custodians, after being told by Sebi, had joined up the clearing houses in most cases. Custodians have to get their clients to participate in the depository also. If a custodian feels it is better for business if there is lesser participation in the depository, it is only a myopic view. It is in their long-term interest to see that their clients participate in the demat segment.