Foreign institutions invested Rs 802 crore (Rs 8.02 billion) in the debt market yesterday, a record single-day investment in the 10 years of foreign institutional investment history.

This is 5,676 per cent higher than the total Rs 13.9 crore (Rs 139 million) invested in debt in May 2002.

The arbitrage opportunity between the overseas and the Indian gilts market is encouraging foreign portfolio investors.

According to information provided by the Securities and Exchange Board of India, foreign portfolio investments amounted to Rs 1,433 crore (Rs 14.33 billion) in debt in 2003 till May 19. This is three times higher that last year's Rs 434.6 crore (Rs 4.346 billion).

Foreign portfolio investors can raise money at the six-month London inter-bank overnight rate (Libor) of about 1.22 per cent and hedge the borrowed funds in the domestic forward foreign exchange market for three months by paying an additional 0.35 per cent.

This brings the total cost of funds to 1.57 per cent. The money is then invested in Indian gilts. The 91-day T-bill gives returns of about 4.6 per cent, an over 2 percentage point margin for overseas investors.

"The rush for Indian debt can primarily be attributed to two reasons. The appreciating rupee, which gives a higher yield leading to better returns, and the huge arbitrage opportunity between the funds raised at Libor and the 91-day T-bill returns in India," Dhawal Dalal, fund manager at DSP Merrill Lynch Fund Managers, explained.

Internationally, too, investors pumped more fresh money into emerging market bond funds last week, the 15th consecutive week of positive flows into this category.

According to the US-based Emerging Portfolio Fund Research, 173 dedicated emerging market bond funds, with $12 billion in assets, absorbed $134.9 million in net investor contributions last week.