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Foreign institutional investors (FIIs) have increased their purchase of corporate bonds as they near the limit they can go in government bonds.
The demand is for corporate bonds in the tenure of two to three years which are issued by public sector undertakings (PSUs) and have been given the highest rating by rating agencies.
Earlier this month, Reserve Bank of India deputy governor H R Khan had said there was no plan to raise the sectoral debt limits.
“The government bonds which are being bought are of longer tenure. The FIIs are putting money which will be beneficial for the country. But on the corporate bonds side, it is more of arbitrage funds. Till the time the view on the currency is positive, you might see this trend continuing,” said a senior treasury official of a foreign bank.
The latest data shows FIIs have bought corporate bonds worth Rs 12,252 crore in September so far, the highest in calendar year 2014. The FII investment cap in corporate debt is $51 billion.
According to data from the National Securities Depository Ltd, as on Monday, 47.17 per cent of the limit was exhausted. The government debt (auction) limit had been used to the tune of 98.58 per cent.
“The view on interest rates has been very positive among FIIs in the past few months. There is a very constructive view among FIIs that RBI's monetary policy stance would ultimately help in containing inflation in the long term,” said Manish Wadhawan, managing director at HSBC India. He said high levels of interest rates among emerging market peers had helped.
In July, RBI had raised the FIIs' sub-limit in government bonds by $5 bn, after the existing $20 bn limit was almost exhausted. However, the overall limit for FII investment in government bonds was kept unchanged at $30 bn.
“The rates in corporate bonds are softening. If these FIIs keep waiting for the government to enhance the government bond limit, these opportunities might be lost. The borrowing costs for the highest rated PSU companies in the two-three year segment has fallen. The fall in rates have been in the range of 15-20 basis points in two to three weeks,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
