The Telegraph
Since 1st March, 1999
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Doddering dollar throws open FII floodgates

Calcutta, April 7: Over the last few months, foreign institutional investors (FIIs) have emerged as a force to reckon with in the Indian debt market.

Until a few months ago, they were active only in the equity market, but they appear to have switched to the debt market with great enthusiasm. Over the last five months they have bought fixed income securities worth Rs 1,054 crore.

Debt market observers say the spurt in foreign institutional activity could be attributed to the weakening of the dollar and the uncertainty in equity markets the world over.

A debt market intermediary explained: “Money is flowing into debt instruments the world over, and in many developed countries, fixed-income securities are trading at a premium. This means, yield is negative and you’d end up with a capital loss if you held the security till maturity. In India, the benchmark 10-year government paper offers an yield of 6 per cent. Add to it the depreciation of the dollar, and you get a phenomenal return on investments, which you can’t expect in developed markets.”

Over the last one year, the dollar has depreciated a shade over 3 per cent against the rupee. But in the not so distant past, the rupee would typically depreciate by about 5 per cent each year.

This, besides the adverse sovereign rating, kept overseas investors from the debt market. But the weakness of the dollar and even more, the paucity of attractive instruments in the developed markets have led to a dramatic change in preferences.

Fund flow from overseas investors was most significant in March. Foreign firms went on a buying spree and committed some Rs 550 crore in Indian debt instruments in a month. This exceeds their investment in equities in March by Rs 140 crore.

The figure for the full fiscal — 2002-03 — however, is not as attractive. FIIs were net sellers in debt for the first seven months of the fiscal, but thanks to the surge in investments in the last five months, they ended the year with an inflow of Rs 162 crore.

The Indian mutual fund industry had expected the rupee to continue to depreciate against the dollar when they launched their overseas investment schemes and had positioned the schemes as an instrument suited for hedging foreign currency risks. But the schemes failed to take off as the dollar started falling vis-à-vis the rupee.

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