FIIs turn net investors in debt for the first time since May .

MUMBAI: Overseas investors were net buyers of Indian debt in December for the first time since May on expectations that sliding trade deficit may make currency stable, and that interest rates might fall boosting bond values. FIIs net bought Rs 5,269 crore worth of Indian bonds against net sales worth Rs 4,917 crore in November.

"Debt-FII flow is returning on account of observed stability in foreign exchange and interest rates," said Paritosh Mathur, MD and head of fixed income and currencies, Deutsche Bank. "With the initial round of tapering event already done, this buying trend can sustain for some time." India's current account deficit, the excess of consumption overseas than earnings, has improved this year with it falling to 1.2% of gross domestic product in the July-September quarter, the lowest level since the January-March quarter in FY11. It was at $21 billion, or 5% of GDP, in the second quarter of FY13. It is felt that RBI governor Rajan may try to rein in inflation by keeping rates high. Once price pressure eases, rates might fall leading to capital appreciation in bonds. Bond prices and yields move in opposite direction.

FII investment in debt gives hope despite the tapering of bond purchases by the Federal Reserve. When the Fed in May last announced it might reduce the purchases, emerging markets, including India, went into a tailspin. FIIs sold bonds, pushing the currency to a record low.

In May 2013, foreign investors net purchased debt worth Rs 2,575 crore, which was about Rs 2,000 crore less compared to Rs 4,441 crore in April, according to data from the Securities and Exchange Board of India website. Since then, they have been selling debt securities. US Fed has already started reducing its monetary largesse since mid-December, when it had decreased monthly bond purchases by $10 billion to $75 billion. It has also hinted at calibrated approach to complete the process that suggests the US economy is recovering.

"The contraction in India's trade deficit along with stabilisation in the rupee has lifted the sentiment in the bond market," said Harihar Krishnamoorthy, head treasurer, FirstRand Bank. "The US tapering too is not expected to be aggressive and short-term rates are likely to remain at zero for long term."

In November 2013, the country's trade deficit narrowed as exports rose. Imports hit the lowest level in more than two-and-a-half years on falling gold demand. It stood at $9.22 billion as against $10.56 billion in the preceding month. Prices of vegetables are also easing, which prompted the governor to pause rate hike at the last meeting.

"Market looks confident about the fact that inflation has peaked," said Krishnamoorthy, adding that the central bank desisting from hiking rate in December policy too acted as a positive trigger. The WPI shot up to 7.52% in November compared to 7% in October. The CPI or retail inflation was as high as 11.24%.

Source : economictimes.indiatimes.com