FPIs likely to set sight on Bharat Bond ETF after RBI nod

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Published: January 25, 2020 3:20:10 AM

The Bharat Bond ETF raised Rs 12,400 crore in its debut offering in December.

rbi, central bankThe RBI on Thursday doubled the investment limit for FPIs in government and corporate bonds to Rs 1.5 lakh crore via the voluntary retention route (VRR).

Even as the Reserve Bank of India (RBI) has permitted foreign portfolio investors (FPIs) to invest in exchange traded funds (ETF) that invest in debt instruments, more fund flows are expected into the Bharat Bond ETF, as the new regulation provides FPIs with a simpler way to invest in high-quality papers while also helping them diversify exposure.

Radhika Gupta, CEO at Edelweiss AMC that manages the Bharat Bond ETF told FE that she believes the central bank’s approval for FPIs to invest in debt ETFs is a positive development. “I think the stated intent was to get more FPIs into the debt market. When we did our initial road shows for Bharat Bond in December, we got very good FPI traction. Access for bond markets has always been a bit difficult and this solves that. We are in conversation with a number of FPIs which have shown interest in this issue as well as the subsequent issue,” Gupta said.

The Bharat Bond ETF raised Rs 12,400 crore in its debut offering in December. Gupta indicated that the figure could expand to an aggregate Rs 15,000 crore over the next few months from FPIs as well as domestic capital.

Experts pointed out that the ETF route has got advantages as far as FPI investments are concerned because many FPIs would have internal limits on investing in a single bond of a country that may prevent them from getting additional exposure to high-quality papers. Through the ETF route, FPIs will be able to take further exposure to many such papers and at the same time get diversification.

Ajay Manglunia, MD and head of institutional fixed income at JM Financial, explained how investing in bonds directly is a cumbersome process for FPIs. “If an FPI wants to diversify, getting 10 different bonds worth a small amount is a tedious process. Also, exiting their investments at one go may also prove difficult. However, the processes are much simpler via the ETF route as smooth entry and exits are possible. Also, FPIs are bullish on ETFs which remains a very popular investment product globally. If you look at the Bharat Bond ETF, one of the advantages is that the expense ratio is minuscule,” he said.

The RBI on Thursday doubled the investment limit for FPIs in government and corporate bonds to Rs 1.5 lakh crore via the voluntary retention route (VRR). The VRR route was opened in March last year. Investments through the route will be free of the macro prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period.

As far as the Bharat Bond ETF is concerned, Gupta of Edelweiss AMC indicated that a re-issuance of the existing Bharat Bond ETF series could happen before the launch of the second ETF.

We could potentially do a re-issuance some time in March, but that is a call that we have to take in sync with the Ministry of Finance. It is a function of CPSE borrowing needs, market appetite, etc. I think before a new issuance, we will see a re-issuance because we have to make sure there is liquidity in the existing series,” Gupta said.

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