Millennium Post

‘No logic for FIIs to invest in debt as arbitrage dips’

The economic logic for foreign funds to invest in domestic debt instruments is withering away as yield differentials are narrowing fast, owing to a steep fall in the rupee, a senior SBI official said on Tuesday.

The official also said looking at the real interest rate and the macro fundamentals of the economy, the rupee has to depreciate by 5 per cent every year.

‘The rupee fall is primarily due to (US Fed Chairman) Ben Bernanke’s statement of a possible QE3 slowdown. Also, the US interest rates have gone up of late. If you see yield of 10 year US treasury is more than 2.21 per cent.'

Kumar further said while the 10-year benchmark yield in the domestic debt market is hovering around 7.3-7.4 per cent, arbitrage opportunity for the FIIs is fast squeezing in the domestic market because of higher hedging cost due to fall in rupee.

‘So, the economic logic in investing here is not there as the hedging cost will be around 6 per cent for FIIs, prompting them to pull out their investment,’ State Bank of India Deputy Managing Director and Group Executive for Global Markets P Pradeep Kumar said.
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