The quota of Rs 4,600 crore allotted to long-term FPIs still remains unutilised.
Ever since investment limits in corporate bonds began to be allotted to foreign portfolio investors (FPIs) on auction basis, foreign investments in state development loans (SDLs) have more than doubled according to data from NSDL. General category FPIs have invested Rs 3,497 crore in SDLs as on September 15 which accounts for 12.27% of the allotted quota of Rs 28,500 crore—in July the utilisation stood close to 5%. The quota of Rs 4,600 crore allotted to long-term FPIs still remains unutilised. In mid-July, Sebi indicated that corporate debt shall be available on-tap for investment by foreign investors till the overall investment reaches 95%, after which, the auction mechanism would be initiated for allocation of the remaining limits.
As FPI utilisation of investment limits in corporate bonds crossed 95% on July 24, an auction was conducted later for allotting investment limits. It is noteworthy that FPIs had shown little interest in SDLs when investment limits were available in central government securities and corporate bonds. According to bond dealers, a lack of transparency in states’ finances had kept the FPIs away from the high yielding SDLs. Another point of contention is the lack of a major difference in the pricing of papers by different states. A state having sluggish finances is able to price its debt almost at the same levels as that of a state which has shown good fiscal prudence. Now that both the G-sec and corporate bond limits have almost been fully utilised, FPIs are moving towards SDLs, albeit gradually.
Vijay Sharma, executive vice-president for fixed income at PNB Gilts points out that FPIs have lately shown some interest in papers of Gujarat, Maharashtra and Tamil Nadu. The 7.03% 2021 SDL of Gujarat was trading at 6.91% while the 8% 2018 Maharasthra SDL was trading at 6.43%.
“However the buying interest has been sporadic and it would be early to say that SDLs have finally arrived in the shopping cart of foreign investors,” Sharma points out. On Monday, the 10-year benchmark yield closed at over a three-month high of 6.61%. Market participants indicate that in recent times, SDLs have been performing better than central government securities. “In the secondary market, SDLs have outperformed the central government securities. Whilst the government bonds have seen a rise in yields over the last few days, the SDLs have been more or less steady,” Sharma points out.