Despite the widespread panic on FII pullout, Neeraj Gambhir, managing director & co-head- fixed income, Nomura India finds it a natural phenonemenon in an open market like India. Gambhir says the market has only seen 10 percent of the FII capital going out.
Gambhir says that FIIs invest in a country based on its fundamentals and considering it hasn't changed over the last six months, FIIs will continue to invest in India.
“Over a longer period of time, the investor allocations towards a country like India will only improve and as we have seen in equities over the last 10 or 15 years, not withstanding the kind of volatility, not withstanding many crisis, steadily the equity money has actually come in,” adds Gambhir in an interview to CNBC-TV18.
As per provisional data, FIIs sold shares worth Rs 2094 crore on Thursday, which is the highest figure in the calendar year 2013.
Below is the edited transcript of Gambhir’s interview to CNBC-TV18.
Q: What do you think is the mood among the foreign institutional investor (FII) debt? How do you gauge it? A lot of money, about USD 3 billion or more USD 3.5 billion walked out in probably four-five weeks, is that a hot money if you can describe it that way, exit over? Or do you think that we are going to see continued pressure albeit maybe of a slightly less quantum?
A: So far, we have not seen a very large amount of money flow out. If one sees between 2009-2012, literally about USD 30 billion worth of flows have come in into Indian fixed income market, as the authorities have actually opened up the market, they have liberalised the limits and the entire process around investing in Indian bonds has become relatively simpler and easier.
Now, what we have seen is just about a 10 percent of that money out. In any market which is relatively open and where the flows are open there is always a possibility that if some money comes in, then some money goes out as the market becomes a little volatile. So, I am personally not very perturbed about just USD 3 billion outflow, it was probably a little bit of hot money, speculative money trying to take advantage of the rally in the bonds that we have seen in the recent times and that has kind of gone back.
Now, is this a large substantial opening up of the gates of a reversal of fund flow? I don’t think so. Most of the money that has come in is completely aware of the dynamics and the fundamentals of the country, which have not really substantially changed over the last six months or so. The key dynamics of the fact that our rates here substantially higher as compared to the rates which are prevailing in rest of the world, even though the differential maybe narrowing specifically with regard to US. However, we still have a substantial yield advantage and I think that carry advantage, that yield advantage is still kind of playing up in our favour.
Q: We have some understanding of FII investments in equity. They have come over a much longer period and they are a play on growth and therefore an eight-nine percent depreciation of the rupee will not make them leg it out immediately. But I don’t know the psychology of debt investors. There it is I would assume more algorithmic. It very easy to calculate the amount of money they will make on coupon or on the paper itself and if 10 percent is lost in currency depreciation, would not that affect the arithmetic of even those who came much earlier. Therefore, would they still be wanting to go out, take their profit before the rupee depreciates even further?
A: There are different kinds of fixed income investors. You have got fairly long-term investors like sovereign wealth funds, central banks and you have also got some trading investors who are basically bank proprietary desks and hedge funds. So, a lot of these investors, especially the trading mentality investors actually come in not seeking currency returns, but they come in seeking the interest rate returns. They basically hedge the currency risk in one form or the other whether it is onshore or offshore.
Most of these investors are not actually very sensitive towards the way the rupee is trading at a particular level. They are actually a lot more sensitive towards what is the differential of interest rates? What is the forward premium that they have to pay while hedging their onshore positions? And that money is not really that much dependent upon how much rupee actually has swung and whether the rupee swings by five percent or 10 percent, I don’t think that is going to make a lot of difference to that money.
I think what has happened is that as rupee has depreciated the forward premium, the cost of hedging for forwards has actually gone up, which has kind of reduced the carry in the very shorter end of the curve and some of the investors who were holding those short-term bonds have actually kind of swung out, many of them maybe actually waiting to re-enter as the markets stabilise and the dynamics of the carry improve. So, I think that is one key aspect of it.
The second key aspect and you said rightly in pointing out that as a country our experience of global fixed income investors is actually pretty small, it is very recent, it is just about two-three year phenomenon. It came in at a very bull market in the global space when the liquidity was quite abundant.
The share of money that we have received form the fixed income investors globally is actually yet very small and part of the reason, our allocations towards India were very small, was that Indian fixed income markets were not really open.
As we have opened the markets, as the ability of some of these investors to get in and buy bonds has improved, some of the allocations have improved, but still there is a very long way to go.
I do feel that over a longer period of time, the investor allocations towards a country like India will only improve and as we have seen in equities over the last 10 or 15 years, not withstanding the kind of volatility, not withstanding many crisis, steadily the equity money has actually come in. I do feel that the share of Indian fixed income market in global fixed income market will actually go up only, given the size of the economy that we are, given the kind of importance that have in the world markets.
So, I do feel that it is a very short-term phenomenon. It is just a little of a froth on the top, which has kind of gone back. I don’t think it is a substantial turnaround from the FIIs in terms of giving up on Indian market and going away.
Q: Staying with the rates, we have seen the 10-year increase quite a bit just in a span of about two-three days. What is it factoring in, in terms of a July policy?
A: On the bond side, we have seen some reaction. It is just about 10-12 basis point (bps) reaction so far. It is not that bad. The reaction on the stock market has been quite severe and quite bad actually compared to what we have seen in many other Asian markets. The bonds’ dynamics are a little better at this point in time given the fact that the markets still believes that the central bank will have to come in with open market operations at a certain point in time to supply the liquidity and that is the real longer term bond-bid.
I do feel that market could stabilise here at around 7.40 percent or 7.45 percent levels in the new 10 year. We have a 10-year bond auction today, which is a substantial increase of the supply of the existing 10-year bond and the current 10 year bond has been trading a little bit special in the sense that the yield is a little bit out of the whack as compared to rest of the curve. We could see some correction in the 10-year bond yield then alignment with rest of the yield curve.
But all in all, I just feel that it is a bit of a pause here. The markets will look to see what happens in the US treasury markets. We are currently at about 2.40-2.42 percent level, if it inches towards 2.75 percent, we can’t rule out another round of selling in the bond markets in sympathy to that. It is a wait and watch in that sense from here onwards.