Foreign institutional investors (FIIs) are likely to increase their investment in corporate bonds, as the limit for government bonds (G-secs) has almost been reached. According to data from the National Securities Depository Ltd, 97.85 per cent of the limit for G-secs had been exhausted as of June 20, while for corporate debt, it was only 37.62 per cent.
Investment in G-secs has been higher because FIIs have been optimistic about India, following the Narendra Modi-led NDA government coming to power at the Centre. Data from the Securities and Exchange Board of India (Sebi) show in May, FIIs invested Rs 20,225 crore in debt papers, the highest so far this year. Experts say most of these investments were in G-secs.
So far this month, FIIs have invested about Rs 16,000 crore in debt papers.
“Since the quota for short-term government bonds is full, FII interest might shift to corporate bonds, particularly bonds from public sector undertakings. Considering the FII limit for government bonds might not be increased, FIIs will have no option but to put in money in corporate bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
Earlier this month, Reserve Bank of India (RBI) Deputy Governor H R Khan had said the government wasn’t considering raising the FIIs limit in G-secs immediately. The Centre allows FIIs to invest up to $ 30 billion in G-secs, including $ 10 billion for specific investors. It is the $ 20-billion limit for all investors that has been almost exhausted.
“Since the G-sec limit for FIIs is full and the corporate bond limit is still available, the interest might shift to corporate bonds. But there is not much liquidity in the corporate bond market. Initially, the interest of FIIs will be for corporate bonds with maturity periods of up to five years,” said Arvind Konar, head of fixed income, Almondz Global Securities.
As the rate cut cycle is yet to begin, FIIs prefer short-term papers among G-secs. The regulator has been trying to encourage FII flows in longer-tenured papers to arrest volatility in the rupee.
To encourage longer-term flows, RBI had, in April, said FII investment in G-secs would be allowed only for dated securities, with maturity periods of at least a year. It had added the existing investment in treasury bills would be allowed to taper off on maturity or sale.