FIIs pull out a whopping $5.3 bn from Indian debt markets in just a month

Foreign institutional investors (FIIs) have pulled out a whopping $5.3 billion from the Indian debt markets in just a month and the bulk of this has been in government bonds,dealers said.

The selling in the last four weeks have nearly wiped out the $5.6 billion in inflows seen between between January and May 21,after which FIIs started to sell down their debt holdings. FII positions in government bonds have now dipped below 60% of the total investment limit of $25 billion.

The selling has been across the board,from treasury bills to 15-year government bonds, said Manish Wadhawan,director and head of rates at HSBC.

Dealers said even though the sell-off has been across tenures,the most liquid bonds have borne the brunt of it. The pressure was more in liquid segments like the 10-year and treasury bills because most of their investments was in these, said a bond trader at a foreign bank.

The rise in bond yields has been uniform across tenures. For instance,the yield on the three-month treasury bill has risen 20 bps to 7.42% while that on the 10-year benchmark 7.16%,2023 bond has also increased 20 bps to 7.52%.

Bond traders are wary of further selling and said that there is no clear view on bond yields as the pressure on emerging market debt has not yet receded.

We will have to wait until the time the dust settles for emerging markets to stabilise. But when will it settle is anybody’s guess, said Wadhawan of HSBC.

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The sell-off began after the US Federal Reserve hinted at a pullback in its quantitative easing programme on May 22. Selling intensified last week after the Fed detailed that it will slow down its bond buying in 2013 and bring it to an end in 2014,if the economy continues to recover.

The heavy bond selling by FIIs has pushed bond yields up by 20 bps in just two days with the 10-year benchmark 7.16%,2023 bond rising to 7.52% on Monday. Bond yields have risen by 35 bps since May 22 when FIIs started selling bonds.

The FII selling in the bond markets has also been as one of the key reasons behind the fall in the rupee which plunged to a fresh all-time low of 59.98/$ on June 20 and ended at 59.68/$ on Monday because of the dollar outflow.