Data shows that in the first week of September, FIIs bought $1.08 billion worth of corporate bonds, taking their outstanding holdings to $22.56 billion. Of the $18.1 billion invested in local bonds so far in 2014, corporate bond purchases totalled $5 billion.
The FII limits for investments in government bonds have been exhausted, so now foreign investors are looking at corporate bonds. Also, FIIs are finding the overall interest rates in India quite attractive and India story quite compelling(contained twin deficits with stable currency), said Manish Wadhawan, managing director and head (interest rates)-global markets, HSBC India.
Dealers said FIIs are picking up bonds issued by public sector companies such as Rural Electrification, Power Finance and other top-rated non-banking finance companies such as Housing Development and Finance (HDFC), LIC Housing Finance and Mahindra Finance.
FIIs have been buying mainly bonds issued by public sector companies in the AAA segment. Some who are looking at even a lower AA+ rating are buying papers of non-banking finance companies, said Ajay Manglunia, senior vice-president and head of debt at Edelweiss Financial Services. Wadhawan of HSBC said most FIIs do not invest in bonds rated below AA. Bonds issued by PSUs and NBFCs have been offering yield of 9-9.4%, around 50 basis points higher than the corresponding government bond.
Yields on corporate bonds are higher than those on government bonds and the spread between the two typically reflects the risk associated with the economy and the company at that time.
While this is not the first time foreign investors have picked up corporate paper, the interest is indeed far greater than previous episodes of big FII purchases. For instance, FIIs picked up more than R500 crore of bonds issued by Power Finance in a recent issue. FIIs also bought bonds issued by REC and HDFC, dealers said.