FPI investments in Indian debt have hit record levels as yield-hungry investors continue to play the India story led by sound fundamentals. Jayesh Mehta, MD and country treasurer at Bank of America Merrill Lynch, tells Bhavik Nair that this money may not be sustainable if geopolitical sentiments enter troubled waters. But Mehta is extremely positive on Indian macros and asserts he has never seen these kinds of fundamentals before. Edited excerpts:
FPIs have poured record funds into Indian debt. Is this money sustainable or will it evaporate if something goes wrong globally?
Yes, if something goes wrong globally, this money can flow out. But let’s look at it this way. If you look at February or March, the FPI investment limits in corporate bonds were not fully utilised. Only in the last three to four months, the flows have come in and the dollar strengthening story is out. Within emerging markets, Indian currency has been the most stable one. If you look at India, I have never seen these kinds of macros in my life. The fiscal deficit and the current account deficit are under control, the growth is much better than the rest of the world and we have more than adequate forex reserves. We can never ask for anything better. And that’s what the foreigners are seeing. Many a time, the foreigners are more bullish on India than the Indians themselves.
There are indications that the US Fed might begin trimming its balance sheet relatively soon. If this happens, do you think the rupee would take a hit led by the dollar’s appreciation?
We survived 2013 when the rupee plunged following the tapering announcement by the US Fed. If the Fed shrinkage of balance sheet happens in a disruptive way, we may go back to the 2008 situation. The good part is the US Fed as well as the other central banks are aware of the situation. All statements made by central banks indicate they want to be as non-disruptive as possible in getting their balance sheets back to normal. They may do it gradually. But, some kind of risk is definitely there.
The US Fed takes great care in making statements. Despite this, there was turmoil in the financial markets in 2013…
At that point in time, the market did over-react because it was the first time such a thing had happened. It was just an announcement and nobody knew anything more than that. India and some other countries in the emerging markets that did not have adequate forex reserves got impacted more. However, most of the market did turn around.
Where do you see the rupee going ahead?
Right now it is a unidirectional market. Wherever the central bank decides to draw the line, that becomes the line. Earlier, it was 66. Now it is 64. People now think that is broken. Moreover, you have IPOs worth Rs 27,000 crore lined up over the next two months just from the insurance segment. Even if foreign investors put in `10,000 crore, that would be a huge inflow. On a seasonality perspective, we thought the rupee would depreciate a little bit in July-August. If you look at it historically, the rupee has always depreciated around this time of the year. But this time, even that has been proved wrong. By the end of the year you may see the currency hitting 62 levels.
FPI investment limits in corporate bonds have almost been fully utilised. Do you think the limits will be increased any time soon?
I don’t think the central bank would be in any hurry to raise the limits when the flows are coming in. It’s great when the going is good but when the going gets difficult, a lot of these funds may go out. Unlike before, the RBI and the ministry of finance are quite coordinated. The central bank would not be too happy in raising the limits but the ministry may wish for it.
What will happen to masala bond limits? Will these be segregated from the overall corporate bond limit allotted to FPIs?
Right now, the FPI investment limits that have been utilised includes the limits that have been kept aside for those firms, which have received approvals for issuing the masala bonds. When the approvals were given, no body would have thought about the timing. If a firm has received approval for issuing masala bonds and the limits have been blocked, there has to be a timeline in which the limits should be utilised. That needs to be figured out and the regulator may come out with something very soon.
We saw a Formosa bond deal happen a few days back in which Taiwanese investors take part. Are we seeing a new pool of liquidity from Asian investors?
Yes, the Formosa bond market is growing. Of course this was the first deal out of India this year. Again, there are some flavours that come to the surface time and again — five years back there was the Malaysian ringgit market. I think it will just go with the global trend. And why only Formosa? If you look at the dollar bonds for Indian entities, they are tightly priced. Right now, India is the flavour.
Do you think more players would be interested in the Formosa market?
Yes, I think so.