Narendra Modi government spices up masala bonds, raises limit

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Published: September 23, 2017 6:10:22 AM

The Reserve Bank of India (RBI) on Friday allowed additional regulated room for foreign portfolio investors (FPIs) into corporate bonds, a move that could lead to accelerated inflows into Indian debt through this fiscal.

Reserve Bank of India, RBI, FPI, Indian debtThe Reserve Bank of India (RBI) on Friday allowed additional regulated room for foreign portfolio investors (FPIs) into corporate bonds, a move that could lead to accelerated inflows into Indian debt through this fiscal. (Image: IE)

The Reserve Bank of India (RBI) on Friday allowed additional regulated room for foreign portfolio investors (FPIs) into corporate bonds, a move that could lead to accelerated inflows into Indian debt through this fiscal. The central bank practically raised the FPI limit by Rs 27,000 crore for Q3FY18 and another Rs 17,000 crore for the last quarter of the year. A part of the raised ceiling — Rs 9,500 crore each of the next two quarters — can be utilised only for long-term investments in infrastructure.  This has been enabled by carving out rupee-denominated or masala bonds, which have been aggressively tapped by India Inc recently including the likes of state-run NHAI and NTPC, from the FPI ceiling. Masala bonds worth Rs 44,001 crore — exactly the same size of additional room created for FPI this fiscal — have been shifted from the FPI basket to external commercial borrowings, a category that is regulated separately.

The masala bonds shifted to ECB include both the existing investments and few transactions in the pipeline.  According to analysts, what has enabled the RBI to relax the curbs on FPI inflows into corporate bonds is that the rupee has changed its direction recently thanks to the strengthening of the dollar after the US Federal Reserve decision to consider a rate hike in December and foreign fund outflows from equities. In September itself, FPIs have net sold close to a billion dollars of Indian equities. For the last couple of months, the FPI ceiling for corporate bonds had virtually put a lid on inflows. In July, the Securities and Exchange of India (Sebi) had issued a circular stating FPI investment limits in corporate bonds will have to be allotted via an auction mechanism once limit utilisation crosses 95% of the overall quota. Till then, the investments were on-tap.

Bond issuers and bankers have been keenly anticipating this hike after the limit utilisation reached almost 100% and fresh masala bond issuances were halted by Sebi in July. The raising of the limit in a staggered manner reflects a similarity to the method followed for government securities.
Karthik Srinivasan, group head of financial sector ratings at Icra said, “With the surge in inflows in Indian debt markets, the cumulative utilisation of the FPI limit in corporate bonds stood at 99.07% as of September 21, 2017, reflecting limited scope of further FPI investments. This seems to have prompted the RBI move.”

According to an estimate by Aberdeen Asset Management, foreign investors own about 7.5% of India’s government and corporate debt, compared with 30% in Indonesia and Malaysia. Even China has also increased up efforts to lure overseas investors to its debt market, beginning a trading link with Hong Kong earlier this year.

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