The utilisation of corporate bond limits by foreign portfolio investors (FPI) has been on a decline since the beginning of April as a weakening rupee, rising oil prices and fears of a possible rate hike are taking a toll on FPI fund flow. The limit utilisation has fallen from 91.85% as on April 2 to 76.68% as on May 30. FPIs are currently permitted an investment limit of Rs 2.66 lakh crore in corporate bonds which was increased from the previous limit of Rs 2.44 lakh crore in early April.
As a result, one could argue that the fall in utilisation limits is a result of the increase in the overall quota. However, the absolute numbers indicate that FPIs seem to be adopting a cautious stance on Indian corporate bonds.
Data from depositories show that FPIs have currently utilised Rs 2.04 lakh crore of the permissible limit as opposed to the utilisation of Rs 2.24 lakh crore in April. This indicates that despite a hike in quota, the absolute investments by FPIs in corporate bonds has fallen. Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Securities points out that FPIs had to re-calibrate their portfolios in corporate bonds to meet the maximum limit of 20% in papers having a maturity period of less than one year post the revised circular from Reserve Bank of India.
“Rupee depreciation, hardening oil prices, rising Consumer Price Index (CPI) inflation and fear of rate hikes have also contributed to the recent fund outflows. The minutes from the RBI policy meeting was a shocker because they were contrary to the policy. The yields have shot up again to around 7.8%. When an investor observes these factors, it creates a selling momentum and drives people towards safeguarding their investments to avoid further depreciation in their holdings,” he said.
The rupee has given a negative return of 5.2% this year. FPIs remain net sellers of Indian bonds to the tune of $4.4 billion since the beginning of this year. The bond market has also gone through some tough times with the benchmark yield rising 49 basis points over the last five months. Ananth Narayan, Professor-Finance at SPJIMR observes that markets are still nervous and any further deterioration in macros, such as oil going to $100/barrel could instigate further volatility.
“FPIs have outstanding debt investments worth over Rs 4.2 trillion in India. A bulk of this money came in post FY14, when India’s stable macros, relatively high Rupee interest rates and stable currency made these investments attractive. In the past 6-9 months, some of that has changed.
With fiscal slippage, rising CAD, surging oil prices, rising global interest rates, geopolitics and domestic uncertainty, our bond and forex markets have been hit and volatility has increased. Still, while we have seen $4.4 billion of FPI debt outflows this year, debt investors have been relatively well-behaved compared to the fed taper-tantrum period of mid-2013. ” The benchmark yield closed five basis points higher at 7.826% on Thursday.