Foreign portfolio investors’ (FPI) debt utilisation in corporate bonds has fallen below 75% of the allocated cap of $51 billion for the first time since March this year, data from depositories show.
Since the beginning of this fiscal, incremental inflows into corporate bonds have remained subdued with the debt utilisation peaking out in end-April at 79.67% or $40.63 billion. As of November 26, the utilisation stood at $38.22 billion—a fall of over $2 billion.
Gopikrishnan MS, head of sales and trading, South Asia at Standard Chartered observes that till the early part of 2015, FPIs were buying corporate bonds because their investment quota in government securities was exhausted and this was the only window through which they could get access to India debt.
“However, in October fresh investment quota of R9,000 crore was opened up in Government bonds and State Government Bonds; hence some amount of FPI selling in corporate bonds could be attributed to the portfolio churn by foreign investors,” he said.
In August 2014, the FII investment limit in G-secs—which stood at $25 billion—was fully exhausted and foreign investors had started turning their attention towards corporate bonds.
This is evident from the fact that the debt utilisation in corporate bonds which stood at over $21 billion in late August ballooned to $40.63 billion by the end of April this year. However, additional inflows since April have remained subdued and the utilisation has also come down.
Manoj Rane, managing director and head of global market and treasury, BNP Paribas India says the restriction on FPI investment into corporate debt securities with a residual maturity of less than three years affected the incremental inflows into corporate bonds.
“Moreover, majority of the FPIs came with a short-term outlook and did not wish to lock in their funds for a long time resulting in the drying up of inflows in this segment since the regulation came into effect,” he pointed out.
Going further, incremental inflows in this segment are likely to depend on any additional demand that is not met by the fresh supply of government securities in January. Bankers also indicate that the winter session of Parliament is something that foreign investors will be keenly watching out.
“The January-March quarter sees fresh allocations and foreign investors tend to buy in this quarter. Moreover, in January there will be another opening up of government bond investment limit. When that happens, it is likely to be immediately exhausted and if demand beyond that still persists, we could see FPIs moving to corporate bonds,” Gopikrishnan added.
