Boom Time Ahead For Debt Market

The move will also give a fillip to debt raising programmes of major corporates like Reliance and Tata Industries which have announced bond and debenture schemes offering attractive interest rates.

The additional inflow of foreign funds into the debt market is also expected to push down interest rates in the economy, more so because the banking sector has already begun reducing rates in view of the low absorption of funds by industry, sources in the financial sector said.

There is, however, some difference of opinion on this count. "I do not see an immediate impact on interest rates because the demand for funds is still much larger than supply," Industrial Finance Corporation of India general manager M V Muthu said.

 

Sources in the financial sector said the decision will also result in some shift in the funding pattern of FIIs from the equity to the debt market.The finance minister has tried to reduce the dependence of the equity market on FII investments by offering tax concessions for investments in shares and units of mutual funds.

FIIs are now expected to come up with debt funds for the infrastructure sector in view of the tax concessions granted in the budget for investments in this sector. Creating such funds should be easy because some of the infrastructure industries like power and telecom are in a position to absorb huge amounts of funds, sources said.

There are hardly any major dedicated debt funds operating in the Indian market. Promoters of telecom services projects will be a major beneficiary because financial institutions are reluctant to offer more than 1:1 debt-equity ratio, leaving a vast fund gap in their project plans.

FIIs are not expected to stick to the debt-equity ratio worked out by Indian institutions and are likely to be more generous. This is because the high return of 20 per cent on debt instruments. In western countries such investments earn the FIIs only about six per cent.

Financial institutions which have to bear a high cost of funds will find it increasingly difficult to persist with high rates of 20-21 per cent if the move triggers off a large inflow of debt funds by FIIs, sources said.

The FIIs, mutual funds and FIs by and large reacted positively to the package announced by the finance minister P Chidambaram to woo the small investor back to the stock-markets.

On permission to FIIs to invest up to 100 per cent of their funds in debt instruments, Alliance Capital vice-president Samir Arora said: "...a lot of debt funds (will) enter the market. However, there should not be any restrictions on the type of debt that can be accessed, though it would be mainly corporate debt segment that FIIs would be interested in."SCICI executive director M J Subbaiah said: "FIIs, by nature, are not long-term investors in bond markets. This relaxation is likely to see them parking funds for a short term."

ITC Classic Threadneedle AMC vice-president Ajay Srinivasan, says there is a need to create an active debt market as a supplementary to allowing FIIs to invest 100 per cent in debt instruments.