The long moribund Indian debt market has sprung to life in 2010. Total investment by foreign institutional investors (FIIs) reached Rs 9,577 crore in just 40 days up to Monday. This is more than twice the Rs 4,563 crore invested by them in Indian debt paper in entire calendar 2009.
Despite the surge, government officials have said there is no proposal to raise the cap for FII investment in government or corporate debt. The caps for the two sectors are set at $5 billion and $15 billion, respectively. Current rules allow the cap to be raised if FII investment crosses 80% of the sectoral caps. Sebi data shows FIIs have exhausted only 50% of their limit in corporate bonds.
The huge surge of interest in Indian debt, especially government paper, follows the robust performance of the Indian economy in 2009-10, despite a high fiscal deficit projected at 6.8% of GDP. Because of these contrasts, Moody?s Investors Service has assigned India?s local currency debt Ba2, two levels below investment grade, while Standard & Poor?s grade is BBB-.
This is the lowest investment-grade level. Since such investment adds to the country?s external debt, the government has kept a lid on such paper. But with huge reserves and the need to give debt market volumes a push as an alternative to equity, the government has lowered the bar. India?s external debt is 5% of GDP as of September 2009.
Debt market dealers said investors have been attracted by the stability of returns commanded by some corporate groups.
Even if spreads have been comparable to paper from other emerging markets, this has been a differential factor. ?There are some very good names in the corporate sector, so investors are content to park funds with them even if the yields are only marginally higher,? explained a dealer with a leading foreign bank.
Birla Sunlife Mutual Fund CEO A Balasubramanian said the yield on a one-year treasury bill is around 4.2%, whereas globally it is much lower. ?As for corporate bonds, the yield on a one-year triple-A paper would be around 5% net of the hedging cost, which should be at least around 100 basis points more than what is available on comparable paper overseas.?
However, in some instances, investors are able to earn as much as 150 bps more on corporate paper, even after building in hedging costs. K Ramakumar, senior VP of fixed income at Sundaram BNP Paribas, said overseas investors have shown interest especially for paper of shorter maturities.
?There is still plenty of headroom available for overseas investors to invest in the debt market and rising interest rates should provide them an opportunity,? he says. Sebi data shows foreign investors hold cumulatively around Rs 41,700 crore worth of Indian debt paper.
