Risk of outflows by FIIs from the Indian debt market is receding as outstanding FII money in debt shrinks
Fresh FII inflows cannot be ruled out given the tight monetary environment, but forward cover continues to remain high at 8%.
Fresh FII inflows cannot be ruled out given the tight monetary environment, but forward cover continues to remain high at 8%.
The risk of outflows by foreign institutional investors (FIIs) from the
Indian debt market is receding as outstanding FII money in debt as of 3
December shrank to $20.5 billion from a high of $39 billion at the end
of May, according to Credit Suisse equity research.
India has seen an FII exodus from the debt market after the US Federal
Reserve first hinted at tapering its $85 billion-a-month bond-buying
programme in May.
Of course, the Fed has since changed its stance and decided to keep the
punchbowl flowing after the US government shutdown and a tentative
recovery in the jobs market. This eased investor fears somewhat, but
more recently, strong economic data out of the US, particularly on the
employment front, has led to renewed fears that tapering will be brought
on the table very soon.
There are some risks for the Indian debt market. FIIs who bought Indian
debt a year ago when prices were high may be forced to take their money
off the table as they would be sitting on mark-to-market losses because
bond prices have declined as yields have shot up. 
There are some risks for the Indian debt market. FIIs who bought Indian
debt a year ago when prices were high may be forced to take their money
off the table as they would be sitting on mark-to-market losses because
bond prices have declined as yields have shot up.
On the other hand, the Indian 10-year bond yield has been rising, with
the yield on the new 10-year paper at 8.85%. Yields are well above their
lows in May and they are quite attractive among emerging markets.
Fresh FII inflows cannot be ruled out given the tight monetary
environment, but forward cover continues to remain high at 8%. Once
hedging costs cool off, we could see some inflows, according to a fixed
income strategist who did not want to be named.
TOUHID HUSSAIN
PGDM 2nd YEAR
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