With foreign institutional investors (FII) having bought corporate bonds worth approximately $3.5 billion in March alone, their cumulative investments in such instruments have touched $10 billion. Given the headroom of just around $5 billion to go before the cap of $15-billion is hit, the Securities and Exchanges Board of India has decided to allocate the unutilised limit for bonds through a bidding process on a first-come-first-serve basis on the National Stock Exchange on Friday. Government bonds will also be allocated through a bidding process.
Moreover, Sebi plans to ration the bonds. In a circular issued, the regulator has trimmed the limits for corporate bonds that can be allotted to individual FIIs to Rs 2,000 crore while the minimum amount that can be bid for is Rs 200 crore. For government papers, the limit has been lowered to Rs 200 crore from Rs 300 crore. However, FII investments in government securities are understood to have almost hit the $5-billion ceiling with the unutilised portion at just around a few hundred million dollars.
The reason for the high appetite for Indian paper is not hard to understand. The yields offered by Indian firms are higher than what investors would get overseas. With the business environment improving, there is no shortage of good credit risk and many companies will become investment-worthy. Already, Crisil?s upgrades have exceeded downgrades in the last six months, reversing a three-year trend, which is a strong evidence of an easier economic environment.
With interest rates expected to rise anywhere between 100 and 150 basis points over the next year or so, there should be no dearth of takers for corporate bonds.
Dealers say the money is parked more or less evenly in shorter-term maturity papers as also longer-term maturities. Data put out by the National Stock Exchange shows that there has been a sharp rise in trading volumes in the last three months of 2009-10, with the volume in March at a record Rs 67,000-crore-plus and at levels of around Rs 53,000 in January. Trading volumes in 2009-10 had crossed Rs 4 lakh crore. That is way above the Rs 1.4 lakh crore reported in 2008-09 and a four-fold increase compared to the volumes of just under Rs 96,000 crore in the year before that. Clearly some of this has to do with FIIs stepping up their investments in debt markets. Also, insurance companies who are now among the bigger money managers are now subscribing to fixed income papers.