The Reserve Bank of India (RBI)’s decision to raise the cap on foreign investment in government bonds failed to cheer the bond market, as the move might not result in an increase in demand from overseas investors.
The apex bank on Monday raised the limit on foreign investment in government bonds by $5 billion to $20 billion, but said the additional investment had been allowed only in securities with a residual maturity of three years.
Bond prices, which were trading high in early trade on expectations of strong measures from the government and the RBI, ended off highs. The central bank’s measures are unlikely to bring in the much-coveted foreign funds, as the major deterrents for FII investment in gilts — lack of reinvestment facility, withholding tax, and residual maturity restrictions — are still in place.
“The recent liberalisation measures are unlikely to spur major inflows into the bond market, as more critical issues such as the government’s rising subsidy burden and the introduction of General Anti-Avoidance Rule in 2013 are still left unresolved,” said an economist with a foreign bank.
According to market participants, while the last increase in FII limit in government papers in November last year attracted off-shore investors to invest $70 billion in bonds, this time around, foreign investors are more concerned about the deteriorating fiscal outlook of the country.
On Monday, yields on the 10-year benchmark 8.15 per cent, 2022 bond eased to 8.04 per cent on hopes that the government and the RBI would take supportive measures to revive the Indian economy. However, after the announcement, yields bounced back and ended the day at 8.09 per cent, after touching an intra-day high of 8.1 per cent, reflecting the market’s disappointment on the measures. Yields on the 10-year benchmark government bond had closed at 8.08 per cent on Friday.
In the past four months, foreign investors have sold around $1.2 billion of bonds, despite falling yields due to the increasing uncertainty.
More From This Section
“The announced measures will not prove supportive of the bond market, as the scope for further currency depreciation remains and that will hinder foreign investors’ demand for India bonds,” he said.
Market players said the move might not make any difference, as there were hardly any government papers auctioned between the three-year and five-year bracket.
| LACK OF CAPITAL BEHIND CURRENCY WOES | ||||
| India’s current account In $ mn | Quarter ended | |||
| 11-Mar | 11-Jun | 11-Sep | 11-Dec | |
| Goods exports | 77,240 | 74,317 | 76,592 | 71,127 |
| Goods imports | 107,100 | 116,144 | 120,529 | 118,848 |
| Trade balance (1) | -29,860 | -41,827 | -43,938 | -47,721 |
| Trade in services balance | 14,510 | 15,540 | 15,520 | 15,072 |
| Income balance | -3,854 | -4,354 | -4,671 | -4,516 |
| Current transfers balance | 13,802 | 14,707 | 16,180 | 17,746 |
| Invisibles balance (2) | 24,458 | 25,894 | 27,029 | 28,302 |
| Current account (1+2) | -5,402 | -15,830 | -18,390 | -19,419 |
| Compiled by BS Research Bureau Source: Bloomberg | ||||
| LOAN BALANCE AND FOREIGN INVESTMENT | ||||
| In $ mn | Quarter ended | |||
| 11-Mar | 11-Jun | 11-Sep | 11-Dec | |
| Foreign Investment | ||||
| Direct investment | 576 | 7,931 | 4,381 | 4,485 |
| Portfolio investment | 198 | 2,541 | -1,196 | 1,898 |
| Total | 773 | 10,472 | 3,185 | 6,383 |
| Loan Balance | ||||
| External assistance balance | 751 | 382 | 324 | 1,385 |
| Commercial borrowings balance | 2,414 | 3,585 | 7,007 | 1,441 |
| Short-term loans balance | 2,708 | 3,069 | 2,871 | -131 |
| Total | 5,873 | 7,035 | 10,202 | 2,695 |
Another reason why the demand from FIIs has fallen in recent months is the withdrawal of reinvestment facility by the Securities and Exchange Board of India (Sebi). In January, Sebi had said debt investment limits allocated to foreign investors through bidding process would lapse, if the investor sold the security or the bonds matured.