According to the latest Bloomberg data, FPI investments in Indian corporate bonds stood at Rs 2.014 lakh crore, with foreign investors utilising 63.53% of the available limit of Rs 3.17 lakh crore.
Foreign portfolio investor (FPI) interest in Indian corporate bonds has been waning over the last few months, with their investments hitting a 10-month low in October, as the perception on credit risk of Indian companies continued to deteriorate because of slowing demand, rising stress across sectors like real estate and NBFCs and a bearish view on the rupee.
According to the latest Bloomberg data, FPI investments in Indian corporate bonds stood at Rs 2.014 lakh crore, with foreign investors utilising 63.53% of the available limit of Rs 3.17 lakh crore. It is noteworthy that at its peak in March this year, FPI investments in Indian corporate bonds stood at Rs 2.194 lakh crore when foreign investors had utilised over 75% of the available limits. The Reserve Bank of India (RBI) has been increasing the FPI investment limits in corporate bonds at regular intervals. This year, the central bank has increased the limits by a total of Rs 27,900 crore.
MS Gopikrishnan, an independent market expert, points out that the perception of credit risk on Indian bonds has increased significantly since the IL&FS default last year. “Even post IL&FS, we saw some instances where defaults occurred. Credit rating downgrades of firms have also created concerns among foreign bond investors,” he said.
A recent report by Crisil said credit quality pressures intensified for India Inc in the first half of fiscal 2020, driven by an interplay of factors including global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending. Constrained access to funding also affected credit profiles of entities across sectors, especially non-banks and real estate, it said.
“The value of debt downgraded more than trebled to Rs 1.38 lakh crore in the first half of fiscal 2020 from Rs 39,000 crore in the first half of fiscal 2019. That’s the highest for any half since fiscal 2016,” the report said.
Gopikrishnan said there was a time when people used to invest in high-yield bonds in the real estate and NBFC sector. “With slowdown and stress affecting these sectors, investor confidence has eroded, leading to lack of interest in these papers. FPIs have reduced buying these kinds of bonds,” he said.
Experts also indicated that a bearish view on the rupee has also had its effect on FPI flows. The rupee has depreciated by 2.34% since the beginning of this year. Many factors like geopolitical tensions in the Middle East, a depreciating yuan and a strong dollar have been pulling the currency down.
Jayesh Mehta, India country treasurer at Bank of America, points out that when FPIs invest in a country’s debt, whether sovereign or corporate, the near-term currency outlook matters. “Unless they are positive on the rupee, most FPIs, especially hedge funds, will not buy Indian bonds. Rates cycle is also closely monitored by FPIs. Despite a 25 basis points cut in the repo rate, bond yields remain high – indicative of oversupply of bonds in the market,” he said.
The RBI has cut the repo rate by 135 basis points since the beginning of this year. In the last monetary policy, the central bank reduced the repo rate by 25 bps. However, bond yields have refused to transmit the same as dealers believe concerns over fiscal deficit still loom large. The new 10-year benchmark yield has been flat since October 4, when the repo reduction was announced.