Steps to bring rupee, CAD back on track: FPI move big positive for realty

Foreign portfolio investors (FPIs) in the debt segment are happy that restrictions regarding their investments in corporate debt papers have been lifted.

Finance Minister Arun Jaitley on Friday said FPIs can now invest more than 20 per cent of their portfolio in any single company, and at the same time, can invest more than 50 per cent in any single issuance of a corporate paper.

The restrictions were put by the Reserve Bank of India (RBI) in April, but were subsequently relaxed for deals already negotiated. Most of the corporate bond papers are placed privately in India. 

According to data from Securities Exchange Board of India, in 2017-18, the corporate sector raised Rs 5.34 trillion through private placement, as against Rs 6.40 trillion in 2016-17.

In case of lower rated firms, private placement, offering high yields is the only option. These NCDs are privately negotiated with one or only a few FPI investors. The FPIs between themselves pick up the entire stock, but the RBI’s April notification prevented that. With the restrictions gone, FPIs can again invest in these papers.

According to Jayesh Mehta, treasurer at Bank of America Merrill Lynch, this will enable a few companies to tap the non-convertible debenture (NCD) space once again. This will particularly benefit the real estate sector, which is largely dependent upon such negotiated deals with FPIs.

But this doesn’t mean that FPIs would start pouring money in India. "The measures announced by the government are only mildly positive. It will lead to some improvement in market sentiments and we might see some positive reaction on Monday," said U R Bhat, managing director, Dalton Capital Advisors.

FPI outflows from the domestic market were seen accelerating last week amid a slide in rupee and spike in bond yields. Although FPI buying had turned positive on Friday, on optimism over trade talks of the US and China.

"As far as FPI flows are concerned, there will be a status quo. They will continue to do what they are doing. On the other hand, we could see some more positivity by mutual funds," Bhat said.

FPIs have been net sellers in debt as well as equities this year. Interest rates hike by the US Fed and 10-year Treasury yields climbing to three per cent have seen FPIs repatriate flows from India and other emerging markets.

According to Ashish Parthasarthy, treasurer of HDFC Bank Ltd, the FPI measures, along with that on the Masala bond side, would enable companies to have easy access to finance, but any immediate effect would be unlikely.

“In the longer term, there could be some amount of borrowing. We will have to wait and watch to see the impact of the measures in the longer term,” Parthasarthy said.

As on September 14, FPIs have utilised 76.66 per cent of their total corporate investment limit of Rs 2.67 trillion. This may go up a little in the coming days.

Experts said that the rupee is likely to open a little stronger on Monday from its previous close of about 72 a dollar level. 

The 10-year bond yields could be about 8 per cent, while some equities could rise, along with the rupee.