High returns, safety of the Indian papers add to the lure.
Lured by high returns and safety of Indian debt, foreign institutional investors (FII) have pumped in a record $6.04 billion (Rs 27,784 crore at today’s rates) in corporate and government papers in the financial year up to March 10. This is a 12-fold rise over their investment of $480 million (Rs 2,208 crore) in 2008-09.
According to data from the Securities and Exchange Board of India (Sebi), FIIs have cumulatively invested $11.24 billion in Indian debt since November 1992. This includes investment in both government and corporate bonds. Sebi does not release segment-wise break-up of debt investments.
“Yields on short-term bonds have moved up and the curve is looking attractive. We have not seen similar participation in the past. We will see an increase in the level of FII flows in debt in the coming year too, as the rating has been upgraded now,” said a senior executive of a foreign bank.
From November 1992, FIIs have invested $76.1 billion in equities till date. Though there is no break-up available on the mix, executives of foreign banks said around one-third, or $4 billion, of the investment is in sovereign paper.
“The interest rate differential between India and other countries has definitely played a role. Investors look for returns and safety and Indians score pretty high on both fronts. Recently, S&P also upgraded its India rating,” said a senior executive of ING Vysya Bank.
Following the collapse of the US-based investment bank Lehmann Brothers in October 2008, investors across the world fled debt markets on the back of default fears. This resulted in FII investment in Indian debt falling to $480 million from $3.14 billion in 2007-08.
“There is definitely more interest in Indian companies. Since then, there has been a revival in the corporate debt market as a whole, and specifically in papers of Indian companies,” said Arvind Sampath, head of bond trading at Standard Chartered Bank. He added that most of the corporate papers being bought were of three-five years duration.
In December last year, the capital markets regulator stipulated that a single FII could invest a maximum of Rs 300 crore in government paper. The minimum amount is Rs 50 crore.
While FIIs can invest in equities without any approval, they have to seek permission from the regulator every time they buy government or corporate bonds. Also, the government has set a ceiling of $5 billion for investment in government securities and treasury bills, while the limit for corporate bonds is capped at $15 billion.
Mutual funds have invested $26.42 billion in the debt market during this financial year till March 10. During the same period, they invested $22.294 billion in the equity market.
