Easing investment norms: FPIs may take to lower rated corporate bonds

RBI's move to scrap short-term and concentration limits opens doors for FPIs to explore high-yield, lower-rated corporate bonds amid attractive returns and easing inflation

The Reserve Bank of India’s (RBI’s) move to scrap short-term investment limit and “concentration limit” for investments by foreign portfolio investors (FPIs) in corporate debt securities is expected to provide greater ease for these investors to invest in lower-rated corporate bonds as yields in the segment remain attractive.

 

Owing to narrowing of yield spread between high-rated bonds and US bonds, the higher yields on lower-rated bonds are expected to attract more investments.

 

The yield spread between the 10-year government bond and 10-year US Treasury bond has narrowed to 179 basis points (bps) from 218 bps at the beginning of the current calendar year (CY25).

 

Previously, foreign investors were permitted to allocate no more than 30 per cent of their total corporate debt investments to instruments with maturities of up to one year. In addition, concentration limits restricted their exposure to 15 per cent of the prevailing investment cap for long-term foreign investments and 10 per cent for other categories.

 

Market participants said that while recent regulatory easing may not trigger an immediate surge in FPI interest, it paves the way for high-yield issuers with solid fundamentals — segments that were previously overlooked due to elevated borrowing costs.

 

“This could push FPIs toward high-yield corporate bonds. Issued by mid-market firms, these bonds often come with strong security and yields between 13 per cent and 20 per cent, making them attractive despite higher risk,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “As global investors hunt for better returns, India’s bond market may find more interest in lower-rated but higher-yielding debt rather than top-tier bonds,” he added. 

 

Foreign investors net sold around ₹20,190 crore worth of domestic debt in April as the yield spread between US 10-year benchmark bond and domestic 10-year benchmark bond narrowed below 200 bps. Of this, ₹13,314 crore was withdrawn through the general investment route, according to data from NSDL. General investment route is a regulatory channel that allows FPIs to invest in Indian debt securities within prescribed limits, without specific restrictions on maturity or issuer.

 

In May so far, FPIs have net sold ₹4,947 crore via general limit route while they have net sold ₹1,476 crore during the same period under the Fully Accessible Route (FAR).

 

“The yield spread has fallen significantly, and we might see further fall in domestic yields given that our inflation data is below the target. This means more rate cuts for us. Yields are now approaching 6.25 per cent, which was earlier seen by the end of June,” said a market participant.

 

India’s CPI inflation eased to a six-year low of 3.16 per cent year-on-year (Y-o-Y) in April, against 3.32 per cent Y-o-Y in March. Food inflation also fell to its lowest level since October 2021.