FIIs switch from debt to equity in rising markets

Buoyed up by the recent indications of a stock market recovery, Foreign Institutional Investors (FIIs) have been switching their investments from the less beneficial debt market to the more lucrative equity market.

Since the beginning of the year, up to May 15, FIIs have withdrawn Rs3,962 crore debt investment, of which 93 per cent, or Rs3697 crore, was during the last one week, as indicated by the stock exchange data.

India's debt market includes government and corporate securities, and commercial paper. FIIs normally invest their funds for shorter periods in debt instruments and move to equities when the market starts to rise, with the prospects of higher returns.

Cost of funds for the FIIs is based on London Inter-Bank Offered Rate (Libor), which is 1.80 per cent at present, with an additional forward premium of 3 per cent on account of weaker rupee compared to the dollar.

A typical Indian debt security traded at 8.50 per cent would make a price differential of around 3.70 per cent which would be attractive to the FIIs when the stock markets perform weak as it happened in 2008. Even a 6 per cent 5-year government bond would fetch a differential return of 1.20 per cent.

Provisional data released by the stock exchanges for Tuesday showed a figure of Rs12,405.89 crore against FII purchases and Rs7,613.33 crore of sales, resulting in a net buy of Rs4,792.56 crore on both BSE and NSE.