Overseas investors fast lapping up corporate bond limits

Lack of investment room in govt securities has led to spillover

Lack of room to invest further in government securities (G-Secs) has resulted in foreign investors taking aggressive bets in Indian corporate papers. According to latest data, about three fourths of the $51-billion (Rs 2.44-lakh-crore) investment limit for foreign institutional investors (FIIs) in corporate bonds has been exhausted. A year ago, FIIs had used only a third of the investment limit.

Ultra-low interest rates in developed countries and attractive yields are making investments in Indian corporate bonds an attractive proposition for FIIs. Stability in the currency market is adding to the draw, say analysts.

“G-Sec limits are fully used and my sense is the government will not open it. We have seen a significant number of investors, who otherwise would have bought only G-Secs, now looking at corporate bonds. These are good signs for the deepening of the bond market,” said Hitendra Dave, head (global markets), HSBC India.

So far this year, FIIs have invested about $6.5 billion in the Indian debt market. As the $30-billion investment limit in G-Secs was exhausted at the end of last year, most of these investments have gone into corporate bonds, say market observers. “If foreign investors want to have exposure to India, the only option is the corporate bond segment. About 90 per cent of the buying is in AAA-rated papers of government-owned companies,” said Piyush Wadhwa, head of trading, IDFC Financial Markets.

Within the corporate bond segment, FIIs prefer papers issued by government-owned entities, including the National Bank for Agriculture and Rural Development, Power Finance Corporation and Exim Bank.

FII investment continues to remain strong, despite the recent tightening in investment norms. Under the new norms, introduced last month, the Reserve Bank of India extended the minimum three-year residual maturity clause to corporate bonds, too. As such, foreign investors have been disallowed from investing in short-term papers — those with maturity periods of less than three years.

The softening of yields, led by a fall in inflation and two rounds of rate cuts by the central bank, has yielded good returns for debt market investors. The yield on the 10-year benchmark G-Sec has dropped from 7.9 per cent at the beginning of this year to 7.65 per cent. Yields on certain corporate bonds have seen sharper rallies. Industry players say some FIIs are taking exposure to lower-rated corporate papers, too. “With the sovereign bond limit not being increased, they are looking for high-yielding papers, which are only available in the lower-rated papers segment,” said K P Jeewan, head of debt, Karvy Capital.

Analysts said interest in the corporate segment would continue, though the pace might slow. With the US looking to increase interest rates after a decade of accommodative monetary policy, liquidity in the corporate bond segment could see a setback, experts said. Also, if the investment ceiling for government papers is increased, the focus could once again return to G-Secs, they add.

“But the economic parameters are improving and so is the confidence in the Indian market. So, we don’t see the rate rise resulting in liquidity being drained out,” said Jeewan.