FII limit for govt debt should be kept unchanged this fiscal

Written by Aparna Iyer | Updated: Oct 14 2014, 07:52am hrs
The RBI would wait until the next financial year before raising investment limits for FIIs in government bonds, having tweaked them in September, says Hitendra Dave, head of global markets, HSBC. In an interview to Aparna Iyer, Dave says the 15% ratio of hedged forex exposure is unacceptable and companies should take cognizance of the risks in unhedged exposure.

FII investment in debt has surged and limits on government bonds have been exhausted. Do you think limits should be raised

We need to give a little more time before we change the limits again. The government securities market is well developed, but the market that really needs offshore participation is the corporate bond market. Also, we cannot forget what happened in 2013 and, thus, a calibrated approach is desirable. For this financial year, the limits should be kept unchanged.

The RBI is concerned about unhedged exposure of companies. As a bank, is it now easier to push customers to hedge

As now banks have to set aside extra capital, there is a natural urge to push the client to hedge. Also, there is enough communication and most corporates would have to sit up and take notice. Fifteen per cent is a very low number and should not be acceptable. There is a sense that RBI is not keen to see a prolonged period of stability or appreciation of the rupee where the current account deficit is masked by capital inflows. Corporate boards and risk committees should incorporate the risks in not hedging.

What is the bond market pricing in for policy rates

At this juncture, a section of the market is looking at inflation data very closely and feels that inflation would trend lower, earlier than the fan chart suggests. But others are still looking at the fiscal overhang. Which is why yields have been stuck at 8.40-8.60% for many months. As far as policy rates are concerned, since the RBI has said they would cut only if they are confident of achieving 6% inflation, it is prudent to assume no cuts in 2014-15.

Despite many positives, why have bond yields not moved

It is only the supply overhang, more than the RBI stance, which has kept bond yields in a tight band. FIIs have taken away close to one-two months of bond supply, global oil prices and many input item prices have fallen substantially. The currency is stable, outlook on inflation is also more positive. But yields have hardly moved because of the persistent weekly supply and also the very substantial state bond supply.

Is the bond market concerned about possible SLR cuts

As far as SLR reduction is concerned, I would credit RBI with very good communication. They have given a roadmap for these SLR cuts, announced a schedule. Going forward when the SLR cuts come, it won't be disruptive. Also, the cuts won't have a big impact as the overall holding level is higher than mandated. Banks are maintaining higher SLR because they want to. Credit offtake remains very weak, the wedge between credit and deposit is wide and this is being channelled into government securities. The dynamic related to the upcoming LCR requirements also has a role.

Have the various tenure repos and reverse repos made short-term curve predictable

We now have a liquidity framework that allows the overnight rates to remain around the repo rate. The kind of volatility we were experiencing earlier no longer exists. The introduction of timely variable repo and reverse repos is a very positive development for the money market. The stability in overnight rates reflects in the treasury bill yields, which have come down 15-20 bps in last six weeks. In the absence of a term repo or variable rate repos and reverse repos, the yields would have been higher reflecting the uncertainty of overnight rates.