FIIs now hold roughly $34 billion worth of corporate bonds and have used up 67% of the total $51 billion of limits available. FIIs have been buying corporate bonds since September 2014 after the investment limit in government bonds was exhausted.
With the US Fed saying it will be “patient” and perhaps not raise rates immediately, the dollars continued to pour into India as foreign investors chase yields. Bankers believe the flow of dollars is unlikely to fall as bonds give one of the highest returns among emerging market countries.
“Indian bonds hold an edge over other markets and FIIs prefer to invest here,” said a bond trader with a foreign bank.
In January, FIIs bought bonds issued by HDFC, National Housing Bank, Power Finance Corporation and Power Grid Corporation. Indian bonds gave a return of 16% in 2014, one of the highest among emerging market economies, thus, making them lucrative investment for foreign investors. With expectations of rate cuts in 2015, FIIs have chosen to build bond holdings to cash in on future gains.
FII investment limit of $30 billion in government bonds is at 99%, with no room for further purchases. This limit was exhausted in August. As and when limits were freed due to redemptions or sale, FIIs lapped up by paying record premiums at auctions where these limits were offered.