Hike FII investment limits in corp debt to boost markets

Notwithstanding the robust inflows in debt market by overseas investors, ICRA today said unless FPI investment limits in corporate bonds are hiked, the net annual debt flows will stay within USD 5-10 billion, in 2017-18.
As of July 24, 2017, the utilisation of FPI (foreign portfolio investors) limits in corporate bonds increased to 97 per cent, reflecting a need for an immediate increase in the limits, ICRA said in a report.
"We maintain that the limit at the current level may not only impact FII inflows into the debt segment but may also reduce the volume of fresh corporate bond issuances to FPIs in the near-term," it said.

FPI pumped in USD 10.11 billion in the country's debt market during the first quarter of 2017-18 - the highest recorded for a quarter in a decade - helped by lower inflation, stable currency levels, expectations of a rate cut in the forthcoming monetary policy besides the less hawkish outlook for a rate hike by the United State Federal Reserve.
The inflows were strong in government debt securities (G-Secs) and corporate bonds even as the FPIs interest in state development loans (SDLs) remained subdued, ICRA said.
However, it noted that while the macro-economic factors continue to remain strong, which will support the Indian rupee against steep depreciation, rising interest rates in advanced economies and limited space in FPI investment limits, may act as constraints for further capital flows into the debt market.

"Notwithstanding the robust FPI debt inflows in the first quarter of 2017-18, unless the FPI investment limits are increased, the current high utilisation levels of these limits and possibility of profit booking opportunities may restrict the net annual FPI debt flows to within our earlier estimates of USD 5-10 billion for the current financial year," it added.
According to ICRA group head (financial sector ratings) Karthik Srinivasan, FPI investment limits in corporate bonds remained unchanged at Rs 2.44 trillion since June 2013, while the volume of corporate bonds outstanding increased at a 22 per cent CAGR during this period from Rs 13.5 trillion as on June 30, 2013 to Rs 24.81 trillion as on June 30, 2017.

"As a result, the FPI limits as percentage of corporate bonds outstanding have effectively reduced to 9.8 per cent from 18 per cent. While a number of steps have already been taken by the government and regulators to deepen the corporate bond markets, a hike in the FPI investment limit in corporate bonds would further aid the cause," Srinivasan added.