Unlike October 2015, when newly opened limits on state development loans (SDLs) were entirely picked up by foreign portfolio investors (FPIs) in a matter of three days, additionally introduced limits on SDLs have remained unutilised.
Beginning January 1, additional limits worth Rs 3,500 crore on SDLs were made available on tap for FPIs which took the total limit to Rs 7,000 crore.
However, depository data till January 4 shows that foreign investors have utilised just 50.88% of the total amount available for investment.
Ashish Vaidya, head of trading and ALM at DBS India believes foreign investors might want to hold back from investing in state development loans (SDLs) as of now considering yields are likely to rise going forward when additional supply of SDLs and UDAY bonds (discoms) hit the market.
Under the much talked about UDAY scheme, states will have to take over 75% of the debt of ailing distribution companies and issue bonds. This is believed to bring in a supply between Rs 70,000 crore to Rs 1 lakh crore of discom bonds into the system— something that market experts believe will take the spread up.
“Moreover, government securities would be the first preference of FPIs rather than SDLs and this is a time when G-sec itself did not receive as good a response from FPIs as it saw in October,” Vaidya pointed out.
Some market participants indicated that liquidity on SDLs might have been a concern along with the fact that fund allocation towards this segment might be limited.
Meanwhile, representatives of a few state governments have expressed their concerns on the relatively higher spreads on SDLs in a meeting with select market participants, a source aware of the development told FE, adding that it was a routine meet chaired by the RBI.
“In response, investors and traders presented their views on the possibility of more re-issuances of the same security in order to increase liquidity in the SDL segment. Market participants also conveyed the idea of issuing SDLs with different maturities,” the source said.
Going forward, the next two to three months are crucial both from the domestic as well as global perspective. February will witness the Union Budget presentation for the fiscal year 2017, which is likely to be keenly watched by foreign investors.
On the global front, the Federal Open Market Committee (FOMC) slotted in March will be crucial as it will be the first Fed meet of the year which is associated with a summary of economic projections— a crucial event since the market will be expecting some guidance over future trajectory of rate hikes.
Till then, market participants say, FPIs are likely to remain a bit cautious. This is evident from Monday’s auction.
Although, foreign investors continued to remain bullish on Indian debt, the cut-off bid and the subscription levels were reasonably lesser than what was seen in October when fresh limits were opened up for the first time since the RBI’s announcement.