FIIs now turn to bonds
Debt instruments attract Rs 2,155 cr in first 11 trading sessions of
2009.
--------------------------------------------------------------------------------
Safe haven
Falling interest rate regime lures FII investments into debt instruments
FIIs earn 5-6 per cent returns on a fully hedged basis
--------------------------------------------------------------------------------
K Ram Kumar
Priya Nair
Mumbai, Jan. 19 If the investment pattern of the first 11 trading sessions in
the new calendar year is anything to go by, Foreign Institutional Investors
(FIIs) appear to be laying much store by investments in debt as compared to
investment in equity.
In 11 trading days of the current year, the lure of earning a decent coupon
coupled with capital appreciation in a falling interest rate regime has
prompted FIIs to channelise investments amounting to Rs 2,155 crore in debt
instruments ('safe-haven' government securities, commercial papers, and
corporate bonds) even as they got unnerved by the uncertainty in the stock
markets worldwide and exited equity investments in India amounting to Rs 2,204
crore.
"There is a 99.99 per cent probability that interest rates will go down. We
expect the central bank to cut signal rates and ratios in a couple of tranches.
We see the LAF corridor in the 2 per cent (reverse repo rate) to 3.5 per cent
(repo rate) band, cash reserve ratio at 3 per cent and statutory liquidity
ratio at 21-22 per cent. This expectation is prompting FIIs to invest in the
corporate bond market," Mr Moses Harding, Executive Vice-President, IndusInd
Bank, said.
In January last year, FIIs had invested a net amount of Rs 1,953 crore in debt
even as they whittled down their equities holding by Rs 13,035 crore.
So what if the equity market is boxed in the 9,000-10,000 points Sensex band?
FIIs have not written off India when it comes to investing in debt. With five
to six per cent returns to be had on a fully-hedged basis, FIIs are making the
most of the interest rate arbitrage between overseas markets and India.
Consider the basic investment math: The cost incurred by an FII investing in
India will be the one-year London Inter-Bank Offered Rate (Libor) i.e. around 2
per cent, plus the one-year forward cover i.e. about 2 per cent. If the FII
invests in a one-year 'AAA' rated debt instrument, it will fetch a return of
10.25-10.50 per cent.
So, the actual return on investment works out to 6.25-6.50 per cent.
With a one-year 'AAA' rated corporate bond currently being dealt at almost 600
basis points over the government security of one-year residual maturity,
offshore investors have latched on to the attractive returns in the corporate
bond market.
The increase in limits for FII investment in corporate bonds from $6 billion to
$15 billion, announced by the Government earlier this month, should encourage
more FII inflows into the bond market, said Mr Harding.
According to Mr B. Prasanna, Managing Director & CEO, ICICI Securities, earlier
the limits for FII investment in both corporate bonds and government securities
were not fully utilised.
But now, with the RBI pro-actively cutting rates, there has been a surge in
interest by FIIs in debt, particularly in corporate bonds.
"The spreads between the 10-year G-sec which is around 5.6 per cent and reverse
repo, which is 4 per cent, is quite high. So, there is a possibility that
interest rates could come down. Therefore, there could be more FII investment
in debt as they would try to capture the capital gain out of falling interest
rates," he said.
The combination of safety of capital coupled with a decent return, even if in
the single digit, is whetting the appetite of the FII, at least till the equity
market revives.
http://www.thehindubusinessline.com/2009/01/20/stories/2009012051860100.htm
ekamber
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