Top-rated companies to get more FII money
The increase in foreign institutional investment (FII) limit for corporate bonds will boost the top end of the market as foreign investors will find it attractive to invest in bonds floated by highly-rated companies.
The government today relaxed the limit for FII investment in rupee-denominated corporate bonds in the country from $6 billion to $15 billion.
The domestic market still offers very high return on bonds. Even after today’s reduction in the repo rate, the prevailing interest rates will be certainly much higher than the US’ 0.25 per cent. Indian bonds will be attractive even after adjusting for the forward cover, say bond market experts.
“The move per se is positive but foreign investors will look at credit quality before putting money and top-rated Indian companies have already borrowed a lot. So there may not be an immediate impact,” said Jigar Shah, senior vice-president, Kim Eng Securities India. Kin Eng is a leading investment bank of Singapore. Despite the high borrowing by companies, they are expected to swap the earlier high-cost bonds with new issues. FIIs would not like to take credit risk now by putting money in low-rated bonds, say experts.
Players in the domestic bond market expect that Indian companies will float bonds issues in the coming months as it is an important route to raise money. The earlier routes, like foreign currency convertible bonds and external commercial borrowings are drying up, they say.
FIIs were selling Indian equities over the last one year but have invested $2.69 billion (Rs 11,174 crore) in Indian bonds, including government bonds, in the last six months. This shows their appetite for Indian bonds.
Various measures announced by the government and RBI today and in the recent past will lead to more inflows, which is expected to result in reduced currency risk. “With these measures, the spread between the gilt and corporate bonds, which is around 300 to 350 basis points, should come down to 200-250 basis points,” said Rama Vasanthrajan, head (fixed income research), Crisil, a ratings and advisory firm.