New FPI route will appeal to long-term debt investors

Investments under the new regime will be over and above current limits for govt, corporate bonds

The proposed new route for foreign portfolio investors’ bets on debt instruments will appeal to long-term investors and give regulatory authorities a better hold over flows, said experts. SAMIE MODAK & ANUP ROY write

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route The will investment be auctioned limits with under the this key allocation criteria being the “retention period”. The RBI has set minimum mum retention period at three years and above FPIs this. will have to bid over and For instance, if an FPI committing to invest $1 billion for five years will be given preference over another investor committing to invest $2 billion for four years. About 67 per cent of the so-called committed portfolio size (CPS) will have to remain invested at all the time (on end-of-day basis). Experts said the VRR route would be ideal for sovereign wealth funds, pension funds and central banks, who are typically long-term investors. Ajay Manglunia, executive vice-president, Edelweiss Finance, said that these investors account for a substantial pie of overall FPI investors and the new rules will help promote a long-term investment culture.

However, some believe that the RBI could allow more flexibility.

“Two-thirds of your investment have to remain deployed all the time. FPIs would need flexibility to sell and re-deploy at any time. The intention behind this is that the money shouldn’t leave the country. RBI can propose a framework to ensure that the money remains in India at the same time investors are forced not to remain invested all the time,” says Bhavin Shah, partner, PwC India.

Industry observers said that the new rules would be a boost for the private non-convertible debenture (NCD) market as FPIs will get to invest in any paper of their choice without much restriction on how much exposure they can take.

The new framework is being introduced at a time when domestic markets are seeing record FPI outflows from the debt market. So far this year, FPIs have pulled out more than $7 billion from the debt market. In comparison, FPIs had invested $23 billion into the domestic debt market last fiscal. The FPI outflows coupled with surging crude oil prices and weakening rupee are putting a strain on India’s trade balance.

Experts said the new route will give the RBI a better handle flows in future.

“The RBI can have clarity over FPI flows and plan accordingly. The debt investment in India is largely hot money flow, and investors take long position on rupee when it is stable, and then short it when dollar shows signs of strengthening. This needed to be checked,” said Jayesh Mehta, head of treasury at Bank of America Merrill Lynch.

The total investment limit available for FPIs in debt is ~6.5 trillion, of which corporate bond investment limit is ~2.9 trillion and the rest is for government securities and state development loans. The existing limits are underutilised, experts said, adding that even the new VRR route will only take off in a big way once the rate and currency environment turns more stable.