FIIs pump Rs6,000 crore into India's debt market in May

Foreign institutional investors (FIIs) have invested around Rs6,000 crore in debt securities in India, reversing the trend in April when foreign investors were net sellers in the debt market.

FIIs were bolstered by the prospect of the next government under the Bharatiya Janata Party (BJP) emerging investor-friendly, adopting long term growth-oriented policies.

The flow of FII money in debt instruments picked up after exit polls showed BJP coming close to a simple majority in the Lok Sabha.

The final result showed BJP gaining 284 seats on its own against the minimum 272 needed for a simple majority in the 543-member house, while its alliance National Democratic Alliance won 334 seats (See: Modi emerges stronger as BJP secures 284 seats).

FIIs' net buying in May (till 15th) in debt securities stood at Rs6,130 crore, data available with the Securities and Exchange Board of India (SEBI) show.

FIIs, who were net buyers in the debt market for four months in a row, turned net sellers in April after they were barred from investing in short-term securities like treasury bills.

FIIs can purchase government securities of a total Rs180,000 crore and the market expect further inflows as foreign funds try to tap the interest differentials  between US treasuries and Indian bonds.

India's benchmark 10-year government bond closed at 8.83 per cent on Friday against the average yield on the 10-year US treasury bill of 2.52 per cent.

However, experts believe any increase in fund flows to the debt market would depend on what the union budget, expected in early July, would offer.

Since long-term investments would depend both on interest rate and currency movements, the risk of investing in longer term debt securities are more. The market, however, is optimistic.

The Reserve Bank of India has restricted FII investments in government securities to dated ones with maturity of a year or more policy, in order to encourage longer-term flows and reduce volatility.

RBI said the existing FII investment in treasury bills would be allowed to taper off on maturity or sale.