After showing a good appetite for Indian debt paper in 2015, foreign portfolio investors (FPI) are expected to buy out most of the additional quantum of government bonds that will be on offer from January 1. Foreign players have bought bonds —both corporate and gilts—worth around $7.5 billion in 2015.
Approximately Rs 13,000 crore of gilts will be available for investment by foreign investors following higher limits allowed by Reserve Bank of India (RBI).
Yields on government bonds are trending at attractive levels, with the benchmark ruling at 7.75%. Jayesh Mehta, MD and country treasurer at Bank of America believes interest from foreign investors will definitely be high. “The yields remain attractive so there should be bids,” he says.
Mehta points out that cut-off rates, however, may be slightly lower than 65 basis points seen during the October auction where a sizeable quantity of gilts was on offer. “There was a lot of pent-up demand at the time,” Mehta explains.
The relative stability of the rupee compared with other currencies is also one reason why FPIs are expected to buy into bonds. More important, as one senior banker observes with the price of crude oil expected to stay below $50 a barrel and the current account deficit in control, the outlook for the currency too is positive.
With the rise in interest rates in the US, however, foreign investors may want to re-balance their portfolios in favour of safe havens. Ashish Vaidya, head of trading and ALM at DBS India feels that might temper the interest of foreign funds in EMs. “We might see FPI interest in G-secs coming down for some time,” Vaidya adds. Asian debt saw maximum interest from foreign investors during the years 2013-14.
Of the additional quota of Rs 13,000 crore, limits on R5,500 crore of G-secs will be put up for auction while R7,500 crore will be available on tap for FPIs looking at long-term investments.
Limits on another Rs 1,858 crore of G-secs are available for investment—open to all FPIs category—according to depository data and are likely to be put up for auction.
G-sec limits that were opened up for long term FPIs in October are yet to be fully utilised. As on December 30, long term FPIs have utilised 93.28% of the quota of Rs 36,600 crore leaving Rs 2,461 crore free.
G-sec yields have not moved much despite the 125 basis points repo rate reduction in the current calendar year. Since December 31 last year, the yields on the benchmark ten-year government bonds have fallen just 9 basis points to 7.76%.
India now trades at a fairly expensive 16 times estimated one-year forward earnings.
Also, within the EM universe, most foreign investors have an overweight stance on India given the country enjoys macroeconomic stability and the potential for growth in the medium term due to the demographics.
As such, while India may be a favourite market, investors are today a more realistic lot. Deutsche Bank economists Taimur Baig and Kaushik Das point out that while India’s growth may outpace that of China, the sentiment at the ground level is subdued. “Working through the sizeable corporate debt burden, a lacklustre export environment and complicated political dynamics has turned out to be much harder than expected,” they wrote recently.
India is now expected to grow at 7.4 % in FY16, lower than the earlier estimate of 8% in April. “A sharp correction in global commodity prices and 125 basis points (bps) rate cuts from the Reserve Bank of India have not yet kick-started investments or added to buoyancy of consumption,” they observed.
Profit downgrades have come in thick and fast to a point where Sensex earnings are now expected to grow at an anaemic 5% in FY16; Bloomberg consensus estimates for FY16 are down by a fifth from Rs 1,890 at the start of 2015 to Rs 1,457. Helped by the smaller base, though, earnings could bounce back in FY17. However, Prasad believes it would be very difficult to see 15-20% earnings growth unless real GDP growth is 10% and inflation is contained at the RBI’s target of 4% by FY18.