Even as fresh investment limits worth Rs 17,001 crore in corporate bonds have been opened up for foreign portfolio investors (FPIs) from January 1 (these will be auctioned soon), experts believe the current attractive yields might draw value buying interest from foreign investors in the next auction, despite the sluggishness in the bond market. Corporate bonds have seen significant interest from general category FPIs, so far, who have already utilised 95% of the permitted limit of Rs 2.25 lakh crore. Of the Rs 17,001 crore limit, Rs 9,500 crore will be set aside for long term FPIs, for investment in the infrastructure sector. This means only Rs 7,501 crore or close to $1.2 billion will be available for the general category FPIs — the most active segment among foreign investors.
Ananth Narayan, a money market expert believes that the prevailing yields might attract foreign investors as the present quota is almost full. “FPIs are likely to pick up the limits. Yields are high anyway,” he said. Despite the sell-off seen in the bond market last week, FPIs have held on to Indian debt, as only $9.43 million of net sales was recorded by foreign investors on Friday. The total net inflow into Indian debt (sovereign paper and corporate bonds) stood close to $23 billion in 2017.
Badrish Kulhalli, head-fixed income at HDFC Standard Life Insurance Company agrees that yields are attractive at current levels, but believes the budget will be the direction setter for the market. “The yield was attractive even at 7.1%, and they are more attractive now. Foreign portfolio investors (FPIs) are likely to wait for the budget and see what the Government’s stance on fiscal deficit is, before committing more funds to the Indian debt segment,” he said. On Monday, the benchmark yield closed at 7.34%. Corporate bonds are priced at a spread over the government bond yields and an increase in the latter pushes up yields on the former.
Interestingly, FPIs have steered clear of state development loans where only about 16% of the permitted investment limit have been utilised so far. Market experts believe this is due to the fact that the yields on SDLs do not accurately reflect the true fundamentals of State finances. Furthermore, long term FPIs remain disinterested in the limits set aside for them in the infrastructure sector. The Rs 9,500 crore investment limit, that was set aside for this category in the third quarter, remains largely unutilised. Over that, another Rs 9,500 crore of limit has been introduced in the fourth quarter taking the total to Rs 19,000 crore.