Debt market rolls out the red carpet

GILT ATTRACTION

FII exposure to gilts up at $2 bn and corporate bonds at $1.5 bn.

The Budget has proposed to increase foreign institutional investors' (FII) exposure to the government securities market from $1.75 billion to $2 billion and the limit for FII investment in corporate bonds from $500 million to $1.5 billion to add depth to the debt market.

However, the euphoria on increase in FII investment limit in government securities has been marred by higher borrowing budgeted for the next fiscal.

According to Manoj Jaju, head of corporate debt , JM Morgan Stanley, this is a positive development at a time when there is growing need for funds from corporates. However, actual investment may have to wait as FIIs will take the plunge only after taking into account the cost of fully hedged funds.

Fully hedged funds include cost of foreign funds as per the international benchmark "" the London interbank offered rate "" and the cost of conversion of foreign currency into local currency.

FIIs usually invest in short-term debt instruments, which include corporate bonds of 3-5 years and government treasury bills of 90 days to one year tenure. The market is looking forward to the guidelines to be issued by the regulator.

The government securities market, however, remained bearish owing to higher estimate for government borrowing for the next fiscal.

According to the estimate, the net borrowing is around Rs 1,14,000 crore against Rs 1,03,000 crore this year.

Moreover, the market is also jittery over the fact that the decision to convert special securities of Rs 22,800 crore issued for recapitalising banks into tradable SLR securities will depress the demand for gilts which is already on the wane.

The gilts market fell with yield on the the top traded security 8.07 per cent 2017 closing at a high of 7.40 per cent as against 7.36/37 per cent on Monday.

Meanwhile, to further deepen the gilts market, it has been proposed to extend access of RBI anonymous electronic order matching trading module - negotiated dealing system to qualified mutual funds, provident funds and pension funds.

In the first phase, the RBI regulated entities - banks and primary dealers "" were allowed to trade on the system and now insurance entities have also been included.

As per the recommendation of the high- level expert committee on corporate bonds, the government has decided to take steps to create a single unified exchange-traded market for corporate bonds.