FII debt inflows to sustain as govt keeps rate lower

The FII limit in government bond is full while for corporate bonds, about 70% has been exhausted

Foreign flows in debt papers are seen continuing with the government extending the concessional rate of five per cent for withholding taxes on debt investments by foreign investors by two years till June 30, 2017.

The concessional rate of five per cent for foreign investors was due to expire in May and the government had cut the withholding tax to five per cent from 20 per cent in 2013. The continuation of this concession was mentioned in the Budget document within the Finance Bill issued on Saturday.

"The idea is to encourage long-term investors to invest in India. If this was not done, foreign investors would have looked for selling debt because their returns would have gone down. This comes as a great relief for them and we might see more foreign investors putting money actively in Indian debt. Since G-Sec (government securities) limit is full, flows in corporate bonds will continue," said Ajay Manglunia, senior vice-president (fixed income) at Edelweiss Securities.

In the Union Budget, it was also decided that in order to rationalise the minimum alternate tax (MAT) provisions for foreign institutional investors (FIIs), profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate shall not be subject to MAT. "Removal of ambiguity around applicability of MAT on FIIs shall attract more inflows," said Manglunia.

So far in the current financial year, the net FII inflows in debt stood at $26.38 billion, compared with net outflows of $4.51 billion in the previous financial year. The flows started picking up from May 2014 after the Bharatiya Janata Party won the elections. The FII limit in government bond is full while for corporate bonds, about 70 per cent has been exhausted.

"If we put together all emerging markets and look at some of the macro key parameters, India rates very high. The International Monetary Fund has cut growth forecast for most countries, but India has retained its upward trajectory. For India, even inflation is coming down. Besides that, our policy rates are among the highest. The combination of strong government and strong macro is making India more attractive on a relative basis," said Amandeep Singh Chopra, group president and head of fixed income at UTI Mutual Fund.

Chopra, too, expects that India will be the favoured market for these FIIs for some more time. "FIIs may soon hit the 90 per cent limit in corporate bonds as that is the only limit which is available," Chopra added.