The finance ministry’s proposal to increase participation of FIIs in government securities (G-sec) market would help in cooling the yields and contain its borrowing cost, bankers said.
RBI and the finance ministry would soon decide on the quantum of hike in the limits for FII investment in the G-sec and corporate bond market.
“We are in discussions with the RBI for raising FII investment in G-sec and corporate bonds; a final decision will be taken next week,” said a senior finance ministry official.
The proposal is critical as primary dealers have been forced to buy bonds in the recent auctions due to lack of investor participation. Banks and financial institutions, the main buyers of bonds, have not shown much enthusiasm in the recent bonds sales as most of them are operating above their statutory liquidity ratio (SLR), and expect the yields to move up further.
Higher FII investments in G-secs would also increase the availability of bank funds for corporates.
The most-traded, new 10-year 8.79%, 2021 bond yield ended at 8.96 % from Friday’s close of 8.94 % as a slightly higher-than-expected inflation number weighed while sustained tightness in domestic liquidity also added to the selling pressure.
Yield on the new 10-year benchmark government bond stood at 8.98%, as compared to 8.94% on Friday as inflation rose one basis point to 9.73% in October.
The government plans to raise the FII investment by $5 billion each for G-sec (to $15 billion) and corporate bonds (to $20 billion). FIIs have nearly exhausted their existing G-sec limit.
?It will be a good move for the bond market. The government does not like to borrow at too high rates. Greater participation by FIIs in G-sec will help cool the rates,? said Oriental Bank Commerce CMD Nagesh Pydah. FIIs, which have been net sellers in equities in the recent months, have jacked up their holding of the bonds.
With interest rates near peak, and bonds selling at lowest possible prices, many investors are hoping to gain from any fall in the rates going forward. Falling interest rates typically result in capital gains on the bond portfolio, resulting in better return.
Care Ratings banking analyst Anuj Jain said the impact of increasing FII investment limit would depend upon the developments in the US and Europe, which are critical in deciding asset allocation by the investors.
?If some European economies start defaulting, FIIs will start booking profits and withdrawing from the emerging market ? that is what the data tells. In that case they may not invest in bonds even though there could be possibility of higher return,? said Jain, suggesting that requirement of liquidity probably plays a more decisive role in an investment decision than the return potential.
