1. FPIs to pick debt over equity again

FPIs to pick debt over equity again

With the Reserve Bank of India (RBI) increasing the foreign portfolio investment (FPI) limit in government securities and also allowing foreign investment into state development loans (SDLs) in a phased manner, FPI inflows into Indian debt is set to surpass equity flows for the second consecutive year, reports fe Bureau in Mumbai.

By: | Mumbai | Published: October 3, 2015 12:43 AM
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FPIs have also been permitted to invest in SDLs, which will be increased in phases to 2% of the outstanding stock by March 2018. This would amount to an additional limit of about Rs 50,000 crore. (Reuters)

With the Reserve Bank of India (RBI) increasing the foreign portfolio investment (FPI) limit in government securities and also allowing foreign investment into state development loans (SDLs) in a phased manner, FPI inflows into Indian debt is set to surpass equity flows for the second consecutive year, reports fe Bureau in Mumbai.

According to Bloomberg data, foreign institutions have invested $6.33 billion in India’s debt capital markets, while equity inflows have halved to $3.6 billion so far this calendar year. In CY14, FPIs invested $26.25 billion in debt instruments compared with $16.16 billion into Indian equities.

Bankers are optimistic FPI appetite for Indian paper will remain robust and additional G-Sec limits will be fully utilised as and when they are announced.

In its September 29 credit policy, the RBI had announced an increase in the FPI limit in G-Secs to 5% of the outstanding stock by March 2018, thereby opening up an additional R1.2 lakh crore investment limit over the next two and a half years.

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FPIs have also been permitted to invest in SDLs, which will be increased in phases to 2% of the outstanding stock by March 2018. This would amount to an additional limit of about Rs 50,000 crore.

Over the next two and a half years, FPI investment limits into G-Secs and SDLs will be close to double the current figure of $30 billion allowed in G-Secs.

Limits for the residual period of the current financial year would be increased in two tranches from October 12 and January 1, 2016.

Each tranche would entail an increase in limits by Rs 13,000 crore for central government securities, of which Rs 7,500 crore will be for long-term investors and Rs 5,500 crore for others, RBI’s September credit policy statement said, adding that Rs 3,500 crore limit in SDLs will also be opened up for all FPI investors.

In contrast, many domestic and foreign brokerages recently trimmed their year-end target on Indian equities citing weak corporate earnings, lack of movement on policy reforms, and external factors.

Deutsche Bank advised Indian clients to stay defensive till emerging market currencies stabilise. “We believe that global macro factors will predominate investor sentiment. Even the RBI’s action in the next credit policy will be determined by global macro factors, particularly the environment for capital flows in EMs and further actions from the PBoC (People’s Bank of China) and the Fed (US Federal Reserve). Investors should be looking out for stabilisation of emerging market currencies and bond spreads, before drawing any comfort on buying beta. Markets will stay unsettled until there is clarity on what the Fed is likely to do,” said Abhay Laijawala, MD and head of research, Deutsche Equities (India).

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