Overseas investors fast lapping up corporate bond limits

Lack of further investment groom in government securities (g-secs) has pushed overseas investors take aggressive bets in the Indian corporate paper. 

As per latest data, nearly three fourth of the $51 billion (Rs 2.44 lakh crore) of investment limit for foreign institutional investors (FIIs) has got lapped up. A year ago, FIIs had used only a third of the investment limit.

Market experts say foreign investors are investing in corporate bonds like never before.

This is after fully utilizing the investment limits in the sovereign paper. Ultra-low interest rates in the developed world and attractive yields, is making investments even in Indian corporate bonds a preposition for FIIs. The stability in the currency market is acting as a tailwind say analysts.

"The government securities (g-sec) limits are fully used up and my sense is that the government will not open it. We have seen significant number of investors who otherwise would have bought only g-secs, are looking at corporate bonds. These are good signs for the deepening of the bond market," said Hitendra Dave, head - global markets, HSBC India.

FIIs have invested nearly $6.5 billion in the Indian debt market so far this calendar year. As the $30 billion investment limit in g-secs were exhausted at the end of last year itself, most of these investments have gone into the corporate bonds, say market observers.

"If foreign investors want have exposure to India, then the only option left is the corporate bond segment. Almost 90 per cent of the buying is happening in the AAA-rated papers of government-owned companies," said Piyush Wadhwa, head of trading, IDFC Financial Markets.

Within corporate bonds, FIIs are preferring papers issued by government-owned entities including Nabard, Power Finance and Exim Bank.

Interestingly, FIIs investment continues to remain strong despite the recent tightening of investing norms by the government. Under the new norms, introduced last month, the Reserve Bank of India has extended the minimum three year residual maturity clause to corporate bonds as well. In other words, overseas investors have been disallowed from investing in short-term paper-those having tenure of less than three years.

The softening of yields, led by cooling off of inflation and two rounds of rate cuts by the RBI, have yielded good returns for debt market investors. The yield on the 10-year benchmark g-sec has dropped from 7.9 per cent during the start of the year to as low as 7.65 per cent. Yields on certain corporate bonds have seen even sharper rally.

Industry players say some FIIs are also taking exposure to even lower rate corporate paper.

"With the sovereign bond limit not being increased, they are looking for high-yielding papers which are only available in the lower-rated papers segment," said K P Jeewan, head of debt, Karvy Capital.

Going forward, analysts said that the interest in the corporate segment would continue but at a slower pace. With the US looking to increase interest rates after a decade of accommodative monetary policy, liquidity in the corporate bond segment could face some setback, experts said. Also, if the investment ceiling government paper is increased focus could once again shift back to g-secs, they add.

"But the economic parameters are improving and so is the confidence in India as a market. So we don't see the rate-hike resulting in liquidity being drained out," said Jeewan.