With the US Federal Reserves monetary policy easing expected to continue after Barack Obama victory, foreign fund inflows into high-yielding Indian debt are expected to continue.
Dealers say Obamas re-election has given continuity to policy for global markets. His re-election would lift market spirit as there is an element of continuity, said a bond trader at a foreign bank.
Indian sovereign bonds that are most traded and liquid offer a yield of anywhere between 8% and 8.5% and corporate bonds offer slightly higher. Considering hedging costs, FIIs can earn at least 2% more on Indian government bonds compared with bonds issued by other countries.
An even bigger play is the capital appreciation since interest rates are expected to head south. FIIs have bid aggressively for both government and corporate bonds at most investment limit auctions conducted by the Securities and Exchange Board of India.
At the auction in October, FIIs lapped up the entire limit offered in the government and corporate bonds with no restrictions on tenure. They paid higher premiums for the limits as well. FIIs lapped up limits worth around $450 million in government bonds and $750 million in corporate bonds in the October auction. They also bought limits worth around $3 billion of long-term government bonds and infrastructure bonds wherein they are required to buy only tenures above three years.
FII money into bonds is unlikely to subside now as Feds policy will remain easy. But flows to our market will depend on domestic factors also, said a merchant banker. FIIs are allowed to invest up to $20 billion in government bonds and $32 billion in corporate bonds excluding qualified institutional investment.