FIIs' demand for corporate bonds set to rise

The demand for corporate bonds is set to soar from foreign institutional investors (FIIs). This is because to spur FII investment in corporate bonds, Finance Minister Arun Jaitley proposed in the Budget a reduction in withholding tax for FIIs to five per cent, from 20 per cent.

According to experts, due to reduction in withholding tax, FIIs' investment in corporate bonds will pick up.

"The withholding tax confusion was holding back the investors. Now, with this clarity, investments in corporate bonds by FIIs will pick up. FIIs' investments in G-sec (government securities) is almost at a level where there is not much room for more investments. In fact in corporate bonds the returns are higher than government bonds," said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

According to data from National Securities Depository Limited (NSDL), as on July 11, only 39.34 per cent of the FII limit in corporate debt had been exhausted. In the current calendar year, FIIs turned net sellers in the Indian debt only in April. In all the other months they have been net buyers. In fact in May, FIIs were net buyers for the highest amount in this calendar year for Rs 20,224.60 crore, show data from the Securities and Exchange Board of India (Sebi).

However, according to experts, there has not been an immediate impact of easing of norms for withholding tax. "Immediate FIIs' interest in corporate bonds has not gone up much because of easing of withholding tax norms. But eventually the demand will pick in corporate bonds from FIIs. As far as yields in corporate bonds, they will start falling once interest rates start falling," said Arvind Konar, head of fixed income, Almondz Global Securities.

The FIIs' limit in government bonds is almost full due to which experts believe corporate bonds of 'AAA'-rated companies will see good demand. The shift in these corporate bonds will also be because the government is not considering raising the FIIs' limit in government bonds immediately. But the corporate bond market lacks liquidity due to which experts believe initially the interest may be in corporate bonds of maturity tenure up to five years.

According to data from NSDL as on July 11, FIIs' limit for government debt (auction) had been exhausted by 99.02 per cent. FIIs' investment in government bonds picked up earlier this year due to the euphoria because of the general elections and it continued due to the victory of a stable government.