Strong rupee lures FPIs to Indian bonds

Buying in the debt market by foreign investors have started after the Reserve Bank of India (RBI) increased the limits for the April-June quarter, but it would take some time to fill the still unutilised limits, as fresh investors are not willing to take a position before more clarity on the US Federal Reserve’s policies emerge. 

The RBI on March 31 increased the limit on central government securities to Rs 2,31,000 crore, from Rs 2,20,000 earlier. Whereas limits for state development loans, or bonds issued by states, were increased to Rs 27,000 crore, from Rs 21,000 crore earlier. 

Following the limit increase, Franklin Templeton bought Rs 10,000 crore in government bonds, just after completing its purchase of Rs 8,000 crore in the last week of March, before the limit was increased, sources say. However, that could be more to do with the fund house’s own plans rather than what other foreign portfolio investors (FPIs) would want. 

Still, the unutilised limits in government bonds would surely be lapped up by the investors in the medium term, say bond dealers. As on April 7, foreign portfolio investors  have finished 75.76 per cent of their investible limit in central government bonds. The amount still left to be bought is Rs 44,822 crore. 

This limit, say bond dealers, would get finished only when the yields increase from the present level. In corporate bonds, foreign investors have finished 79.11 per cent of their total limit of $51 billion. This is because the spreads between AAA rated corporate bonds and equivalent maturity government bonds have increased by more than 80 basis points (bps), from a normal 50 bps. One basis point is a hundredth of a percentage point.   The 10-year bond yields closed at 7.06 per cent on Monday.

“At the current yields, investors would wait for some time as the return is not that attractive. If yields rise by another 10-15 bps, it would be a good buy for the foreign investors,” said Jayesh Mehta, head of treasury at Bank of America Merril Lynch. 

As the Reserve Bank of India (RBI) indicated that rates would unlikely go down from the present level, yields would harden, say bond dealers.

“There is absolutely no shortage of liquidity in the world and they are getting invested in all the emerging market debt papers,” said Harihar Krishnamurthy.

So far this calendar year, FPIs have invested Rs 39,664 crore in Indian debt. In April so far, the investment has already crossed Rs 10,000 crore, largely due to recent buying by Franklin.  In the entire calendar year 2016, FPIs were net sellers, liquidating Rs 44,092 crore from Indian debt. The FPIs sold last year as the US Federal Reserve started raising rates and India was still in the rate cutting cycle. This squeezed the interest rate differential between the two countries, which was unattractive for the foreign investors. Add to it, the rupee’s losses last year made Indian assets less appealing for the investors. As the rupee losses its value, the net realisable in dollar through rupee assets gets lesser. 

But the above-mentioned concerns are not present now. 

“The global condition is very conducive for emerging markets. Even as the US Fed has warned of unwinding its balance sheet, they have not yet given a clear dateline for it. We are very much in a QE (quantitative easing) world,” said the head of fixed income in a foreign bank who was not authorised to speak with the media. 

The rupee has appreciated more than 5 per cent in this calendar year and this adds to the attractiveness of Indian debt paper for the foreigners. 

“For a foreign investor, it is mostly the local currency, rather than a few basis point change in yields, matters the most. If the local currency depreciates 2-3 per cent, then the gains in high yields get easily negated. So a hawkish stance by the RBI is good for the rupee and good for the foreign investors and the unutilised limit should eventually fill up,” said a fund manager of an insurance company who regularly deals with foreign investors.