The falling rupee might continue to keep foreign investors away from Indian debt in the near future. In the past month, these investors sold debt of Rs 18,345 crore ($3.19 billion) and the trend is likely to continue until the rupee shows stability. It has plunged 7.1 per cent in the past month and is near its all-time (intra-day) low of Rs 60.06.
As compared to debt, equities have witnessed lower selling pressure. Foreign investors have sold equity of only Rs 1,374 crore in June. Global uncertainties have seen them taking a breather from buying Indian equities lately and lack of buying from domestic institutions has resulted in lacklustre markets. Foriegn institutional investors (FIIs) are said to be taking a wait and watch approach, looking for cues from the Fed's meeting tomorrow.
But it's the redemptions in the debt segment that has the government worried. Bond experts say the biggest factor which has driven away foreign investors has been the volatile rupee. The cost of holding domestic bonds has increased, as foreign investors pay more towards higher hedging due to the rising foreign exchange risk. Foreign investors also see payouts from their Indian domestic holdings shrink when the rupee falls.
Indian debt yields are higher than in other emerging markets but the high returns might not be attractive enough against a falling rupee. Says Kaustubh Kulkarni, head of local currency debt, Standard Chartered India: “The current market dislocation is temporary and is happening due to volatility in the forex market. The rupee movement can significantly dent a bond investor's profit.”
Emerging market bonds have seen sharp redemptions of about $4.5 billion in the past month as investors worry the liquidity provided by the US Fed through its quantitative easing could taper off. Treasury yields in the US have increased, sparking a further exodus from emerging markets. The difference in yields between the US 10-year Treasury and the Indian 10-year G-sec has reduced from 5.46 per cent to 5.09 per cent in the past month.
This has led to foreign investors rebalancing their debt portfolios towards developed markets. They were also sitting on large bond gains due to the cut in interest rates in domestic markets. Says Kulkarni: “Foreign investors had made a decent amount of profit on the corporate bond front and this is why they rebalanced. It's a relative value play that bond investors are looking at, after seeing forward yields and local bond yields.”
India's debt market share is less than five per cent of emerging markets’ debt; the impact of selling Indian debt in the local market has hardly affected yields.
The S&P BSE Sensex hit a fresh intraday low on Thursday as selling pressure intensified with the gap-down opening of European peers. The global markets rattled in trade after the US Federal Reserve Chairman Ben Bernanke said that the Fed could begin to taper down its key stimulus program later this year.
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