FIIs may dump govt debt if inflation fall reverses: Nomura

Overseas investors, who have become net buyers of government debt so far this year, may reverse the trend if moderation in inflation does not continue, says a report.

Foreign institutional investors have pumped in USD 2.8 billion in debt market between January 1 and 17.

Also read: Mayaram panel considers 2 categories for foreign investment"If inflation does not moderate much, as we expect, it could also prompt the return of higher interest rate expectations, which would increase the risk of net outflows returning," Nomura said in a report today.

Wholesale price-based inflation eased to 6.1 per cent in December from 7.52 per cent a month earlier, while the retail inflation, or CPI lowered to 9.9 per cent from 11.6 per cent. Last December, FIIs became net buyers of debt, after six month of steady outflows, as US Federal Reserves announced reduction in its bond purchases by USD 85 billion in late May.

But the tide turned after in late December it announced a roadmap for tapering under which it said it would begin tapering by reducing bond buyback by USD 10 billion a month beginning this month. The report further said the higher debt inflows is a product of seasonality as FIIs inflows are strong at the beginning of the year.

"The flows are also likely due to the relatively stable exchange rate and expectations that the status quo will remain for policy rates because of lower inflation," Nomura said. It expects that the higher debt inflows from FIIs will help finance the current account deficit in the near term.