According to NSDL data, FIIs have utilised just $38.76 billion of $51-billion investment limit
MOST of the corporate bond issuances this year have been subscribed to by local investors with foreign investors not showing much of an appetite. The value of bonds issued has risen 150% in the first five months of this fiscal compared to last year.
Data from the depositories show a very marginal fall in debt utilisation status by foreign funds compared to the beginning of April. According to National Securities Depositories (NSDL) data, FIIs have utilised 76.01% of their $51-billion quota in Indian corporate bonds as on September 11, while, on April 1, the utilisation status was at 77.43% — a fall of only 1.42%. This means FIIs have just used $38.76 billion out of the $51-billion investment limit in corporate bonds.
Shashikant Rathi, executive vice-president and head, investments, ALM and capital markets at Axis Bank, said the absence of incremental inflows from FIIs into Indian corporate bonds can also be attributed to the fact that, since February, FIIs are not allowed to invest in corporate bonds with maturities less than three years.
“Since a lot of FII interest was seen in shorter maturities, this might have contributed to the fall in incremental inflows,” Rathi said.
Ananth Narayan, regional head of financial markets, South Asia at Standard Chartered, said many FII entities have global mandates to only invest in government bonds.
“When the government bond limit for FII was exhausted in India, some of these FIIs actually expanded their mandates to invest in quasi-sovereign bonds, only in India. This additional flexibility seems to have been exhausted for a while now, particularly with corporate spreads narrowing, and given relatively low liquidity in corporate bonds compared to government debt,” Narayan asserted.
It is interesting to note that the issuances of corporate bonds have seen a huge rise compared to last year with much of the corporate borrowing shifting to the bond markets due to attractive yields. Companies have borrowed a whopping R2.16 lakh crore through the corporate bond market in the first five months of this fiscal.
FIIs had exhausted their investment limits in government bonds in August 2014 itself. After that, they have been paying reasonable premiums to buy whatever limits get freed mostly due to redemptions.
Between May and September, this year a number of events like the selloffs in global bonds, the China market meltdown followed by Yuan depreciation, eurozone crisis and intermittent fears of rate hike in the US had led to a spike in volatility.
Despite this, the Indian debt markets have been in a comparatively stable position considering that there has not been any considerable exit by FIIs from the corporate bonds although their approach was cautious.
Chetan Joshi, head of debt capital markets, India at HSBC, said given the global volatility themes that have been dominant this year, debt FIIs have been adopting a more cautious approach during this period compared to the flows last year.
“Despite the EM credit market volatility and the overall slowdown in FII flows into India, the Indian corporate bond market continues to maintain a relatively stable level of net FII debt investments,” he added.
The US Federal Open Market Committee (FOMC) meet this week and the Reserve Bank of India’s credit policy on September 29 are the two big events that FIIs seem to be watching out for closely. Still, experts do not see FIIs utilising the entire limit anywhere in the near term.
Sandeep Bagla, associate director at Trust Group, believes that for foreign investors, liquidity is a matter of great importance. “Government bond markets are more liquid than corporate bond markets. It seems unlikely that the FII limits in corporate bonds will get completely filled in the near future,” he said.