Foreign portfolio investors (FPIs) had acquired $16.7 billion!

  1. Foreign portfolio investors (FPIs) had acquired an additional $16.7 billion worth of bonds in the country during 2014, after netting for sales. This near-eight-month record compares with net sales of bonds totaling $8 billion in 2013 and net purchases of $6.6 billion in 2012.
  2. With RBI governor Raghuram Rajan’s main focus now on containing inflation, bond dealers do not see any immediate cut in key policy rates which could have directly brought down the benchmark yield on the 10-year government securities from the current level of about 8.50%.
  3. Bond market players expect that given strong demand for gilts form FIIs, the government may now increase the $25-billion limit and bring down the limit for corporate bonds. If that happens as more FIIs rush to buy gilts, prices will rise and yields will soften.

Market Outlook

The Indian rupee appreciated over 6% in the beginning of 2014 due to huge foreign investment in the country’s debt and equity market. This rally was led on the hopes of a strong and stable government to revive the Indian economy. However the trend for the INR has reversed in last 2 months.

The risk factors for the Indian rupee include high inflation, Middle East crisis, low percentage of forex reserves/ external debt, and Fed tapering. The foreign investors have high expectations from the ruling government. If these expectations are not met, then the Indian rupee is likely to depreciate further.

FII report

Talk of volatility in the currency market and issues surrounding capital flows are back.

The Indian rupee depreciated over 3% against the US dollar between 2 July and 6 August. Although it has recovered some ground, foreign investors have been net sellers in August. Net selling in debt market by foreign investors in August has been to the tune of $709.17 million so far, while the net buying in equity market is only worth $166.55 million. In July, foreign investors invested $1.93 billion and $3.83 billion in equity and debt market, respectively.

Last year, Indian markets witnessed high volatility after the Fed indicated for the first time that it will reduce the quantum of asset purchase, popularly referred to as tapering. Foreign investors sold Indian assets (equity and debt) worth over $12.5 billion in three months to August.

Experts are of the view that markets may be subjected to volatility as the US central bank ends its asset purchase programme, but it will not be at the same scale as witnessed last year.

Indian rupee has witnessed some volatility and inflows from foreign investors in the equity markets have slowed, while the debt market has seen net selling in the current month. It is always difficult to prejudge the extent and timing of the way policy decisions will affect global financial markets and to what extent Indian markets will be affected. However, irrespective of the way things pan out in the global financial markets, investors in India will draw comfort from the fact that compared to last year, fundamentals have improved and the outlook on Indian markets is positive.

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