Foreign investors have pulled out almost Rs 6,000 crore (USD 962 million) from the Indian debt market in a fortnight amid lack of clarity over tax norms for returns on such investments and weakness in the rupee.
Since June, foreign institutional investors (FIIs) have withdrawn more than Rs 51,000 crore from the debt market, according to Sebi data. In the first five months of 2013, their net investment was almost Rs 25,000 crore.
During August 1-16, FIIs were gross buyers of debt worth Rs 5,257 crore, while they sold Rs 11,150 crore of bonds, translating into a net outflow of Rs 5,894 crore. Overseas investors infused a net Rs 1,601 crore (USD 262 million) in the stock market during this period.
Many FIIs are holding back their investments in Indian debentures due to lack of clarity on whether such instruments would attract lower withholding tax allowed by the government in May for bonds. It is unclear whether debentures are eligible for the lower withholding and this is resulting in holding back of investments in Indian debt.
Besides, weakness in the Indian currency has been a factor in outflows as the rising cost of hedging a volatile rupee hurts yields for FIIs.
To attract greater participation in debt securities by foreign investors and accelerate the pace of economic growth, the government in May reduced the withholding tax on interest earned on bonds to 5 per cent from 20 per cent.
Meanwhile, the rupee slumped to a lifetime low of 62.03 (intra-day) against the dollar on August 16. Since April 30, the local currency has depreciated by about 14 per cent.
The Indian debt markets had witnessed robust interest from FIIs last year, when their net investments stood at close to Rs 35,000 crore.
So far this year, foreign investors have pulled out a net over Rs 27,000 crore (USD 4.2 billion) from the debt market.