Foreign inflows into the Indian debt market may not see any fall after the Reserve Bank of India’s decision to make a minimum residual maturity of three years mandatory for foreign portfolio investments (FPI) in Indian debt markets, according to market experts.
“It is a prudential measure to bring in stable flows in the corporate debt space and will not impact flows as a sizable portion of the inflow has been in the five-year-or-more segment over the last 4-6 months,” said Ajay Manglunia, senior vice-president-fixed income, Edelweiss Securities.
Earlier, RBI had introduced the mandate of a minimum three-year residual maturity for FPI investments in government bonds.
“To harmonise requirements, it is decided in consultation with the government that all future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years,” RBI had stated in the press release.
“Generally, shorter investment is considered volatile, considering which RBI had made the minimum three-year residual maturity mandatory on the G-Secs. We would put the new norms as rationalising the same for corporate bonds,” said Jayesh Mehta, managing director, country treasurer and Head of FICC at Bank of America-Merrill Lynch.
Foreign institutional investors have poured $3.96 billion into the Indian debt market as on February 2, 2015, from the beginning of this year and the figure seems to be fast approaching the $4-billion mark.
“A lot of FII inflows were coming in the form of arbitrage flows at the short-end of the curve on a fully hedged basis. The new measures will stop these unwarranted inflows and create room for people who are looking to invest in Indian bonds with a medium-term horizon. The measure is a positive for the corporate bond markets,” said Sandeep Bagla, associate director, Trust Group.
However, some companies which are frequent issuers of short-term debt may find it hard to raise money at previous rates.
“The yields for short-term bonds having maturity less than three years had gone up by 15 bps. For new borrowing, this will mainly impact the NBFCs as they borrow mainly for less than three years,” Mehta added.
One bond arranger, who did not wish to be named, said some companies that are frequent issuers of short-term bonds may now look at issuing bonds for a tenure of more than three years. The advantage in raising short-term bonds is that the companies could raise money at very attractive rates, he said.