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Experts see an additional liquidity in the region of $15 billion as a result of this move, which could help cash-starved companies raise cheaper money.
Over the weekend, the government had stated it would remove sub-limits within which FIIs were allowed to buy in to Indian debt. There would now be limits for only two broad categories — government securities and corporate bonds. Under the existing norms, there is a ceiling of $1 billion for qualified foreign investors (QFIs) and $25 billion for FIIs in corporate bonds, besides $25 billion for FIIs in long-term infra bonds.
All of this would now be merged — retaining the overall cap for corporate bonds at $51 billion. Also, FIIs can currently invest in government securities up to $10 billion and dated securities of an additional $15 billion. These sub-limits would be merged to retain the overall cap of $25 billion. The new norms are set to be operational from April 1.
Abhijit Gulanikar, chief officer-investments, SBI Life Insurance Company, said that there would be a marginal positive impact on rate-sensitive sectors. “When the limits are freed, there would be greater demand for government bonds. This would reduce yield and help rate-sensitive sectors.”
Lower yields reduce the cost of funds for these companies when they look to raise money from the market.
Bankers said the move could also help corporate bonds, where total foreign investment, including in infrastructure, was well below the permissible amount. Government securities have been fully lapped up.
Rate-sensitive sectors were up on Monday. The S&P BSE Realty index was the best performing sectoral index, rising 0.79 per cent even as the Sensex was down 0.29 per cent. The S&P BSE power sector, which tracks the indebted sector, also ended in positive territory, up 0.56 per cent.
Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India), said the currency factor would also be a positive one for equities in general along with the rate sensitive stocks. “The currency will also stabilise with additional money coming in to the country. The liquidity would bring down the yield and affect the rate-sensitive sectors in a positive way. There are a lot of foreign investors who are looking at Indian government debt instruments,” he said.
But the withholding tax of up to 20 per cent on the interest paid on the country's debt will continue to be a hindrance to attract FII inflows in debt. Bankers said the government has been reluctant to reduce this, fearing loss of revenues.
A Bank of America Merrill Lynch report authored by its India Economist, Indranil Sengupta noted that the government may make additional moves to bring in inflows.
“Future steps will likely include withholding tax cuts (to 5 per cent from 20 per cent) for corporate and government bonds and floatation of NRI deposits,” said the report dated 25th March.
TAILWIND FOR DEBT-LADEN FIRMS
- Govt introduces fungibility on sub-limits for FIIs
- More money comes in from FIIs
- Greater demand for government securities results in softer yields
- Rate at which corporates raise funds is linked to yield
- Lower yield means lower cost of funds for corporates
- Positive for stocks from rate-sensitive sectors
