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Foreign portfolio investors’ debt sale at 5-month high in November |
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MUMBAI: If you want to know what's in store when the Federal Reserve takes its baby steps to return to normalisation of monetary policy, look no further than foreign investors' sale of Indian debt. Foreign portfolio investors' sale of Indian debt has been the highest in five months till November, weeks before US central bank chief Janet Yellen is expected to raise interest rates for the first time in eight years. While this would reduce the attractiveness of the Indian yield, it would also make carry-trade expensive where borrowing in US dollars gets costly.
Overseas investors net sold Rs 2,565 crore worth of debt securities up for the month of November so far compared with Rs 15,701 crore net invested a month ago, show data from NSDL, a depository. Fund outflows may extend for the next few weeks as the US central bank will meet on December 15-16 to debate on a possible rate hike.
A rate increase in the US amid falling rates in India actually narrows the yield spread, or gap, a key trigger for foreign portfolio investors (FPIs) investing in emerging markets such as India. US interest rates are at near zero.
"A Fed lift-off in December has been partially priced in," said Brijen Puri, managing director, head of markets, JP Morgan (India). "While there may still be some volatility as we move closer to the Fed policy announcement, any risk of a selloff would be less than in the run-up to the September Fed decision."
"Investors will closely watch the Fed policy language for clues on the pace of future hikes," he said.
US benchmark treasury is now yielding 2.25 per cent against India's sovereign yield at around 7.70 per cent.
Investors had been expecting a rate hike since last September when Yellen had deferred the decision citing weak inflation. With a rate hike almost a certainty in December, investors will now keenly watch the language pointing to a gradual normalization. Although a 25 basis points rate hike is expected, they will try to gauge the pace of the increase, judging from Yellen's statements.
"There is always a capital flight in emerging markets whenever rates are hiked in developed economies," said Ashutosh Khajuria, ED and CFO of Federal Bank. "It is a risk-return trade-off."
"But there is likely to be fresh FPI inflows once markets absorb them, based on new calibrations of the rate differential between the US and India," he said.
While FPIs with larger share of unhedged exposures may be exiting, this in turn, would send bond yields higher, pushing prices down.
Despite a sharper-than-expected rate cut by the Reserve Bank of India, the benchmark bond is now yielding about 7.70 per cent, 95 basis points higher than the repo, at which banks borrow funds from the central bank.
On the back of FPI selling, the gap may expand to 100-105 bps, an attractive fresh entry point for yield-hungry investors, dealers said.
Investors would be constructive on India assets, given the controlled twin deficits, stable currency and positive real interest rates, said Puri.
Source : economictimes.indiatimes.com
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