FIIs continue to sell in debt mkts

Weak rupee adds to pressure,global sentiment nervous ahead of key US economic data.

Foreign institutional investors continued to be heavy sellers in the debt markets for a second week as the Indian currency depreciated and global market sentiment remained nervous ahead of key US economic data. FIIs sold R5,787 crore in the debt markets between Monday and Thursday,according to Sebi data reported with a one-day lag. While data for Friday were not available,traders said FIIs were seen selling down their debt holdings on Friday as well.

FIIs turned net sellers of Indian debt starting May 23 after US Federal Reserve chairman Ben Bernanke comments that suggested Fed may consider cutting the size of asset purchase programme,which in turn could tighten global liquidity conditions. Since then,FIIs have been net sellers each day and have cumulatively sold R13,343 crore in Indian debt. The heaviest selling was seen on May 23 when FIIs sold R2,478 crore.

The interest differential between Indian yields and the US Treasury yield has narrowed, explained Moses Harding,Head,ALCO and Economic & Market Research at IndusInd Bank. On a fully hedged basis,it makes more sense to stay invested in treasuries, he added. US Treasury yields have been rising in anticipation of a reduction in the Feds asset purchase plan.

Adding to the selling pressure has been the weakness in rupee which has also spurred selling from FIIs. Once the perception is built that the rupee is a depreciating currency,foreign investors may reconsider their investments, said Indranil Sengupta,economist at Bank of America-Merrill Lynch. Interstingly,FIIs have remained net buyers in the equity markets on most days over last two weeks,although the quantum of net buying in equities has reduced.

FIIs have been aggressive buyers of debt since the start of the year due to the higher yields offered by the government and corporate debt. Measures taken by the government to ease FII investment rules by doing away with sub-limits and reducing the withholding tax on debt investments have also helped. In March and April,FIIs were net buyers to the tune of R5,795 crore and R5,334 crore respectively. In May,net buys were much lower at R1,541 due the selling seen in the final week of the month.

Market experts,however,believe while short-term funds may choose to book profits due to global volatility, long term funds will continue to flow into the Indian debt markets. Over the last few months,the government and RBI have been making efforts to draw in more equity and debt capital into the economy to help fund a record high current account deficit which hit 6.7% in the third quarter of FY13. RBI,however,has maintained they prefer non debt creating flows to try and bridge the current account gap.