Greater FPI play in G-Secs not a game changer

The recent enhancement of investment limits in government bonds by the Reserve Bank of India (RBI) for foreign portfolio investors (FPIs) is neither seen as a big change for the near term or as having a major positive impact on the rupee's value against the dollar.

For FPIs, the central bank will be increasing the investment limit for government securities to ~179,500 crore by January 1 from the existing ~153,500 crore. For state development loans (SDL), the limit will be enhanced to ~7,000 crore by January 1; it is currently nil.

“In the near term, the enhancement of limits might not be a big game changer as the limit available on October 12 is only ~5,500 crore for non-sovereigns. Also, the uncertainty in emerging markets might deter some investors,” said Manish Wadhawan, head of interest rates at HSBC India.

Securities and Exchange Board of India data showed that after two straight months of net outflow in debt, September was positive though inflows were a meagre ~166 crore compared with ~16,177 crore in September 2014.

The rupee had appreciated in recent times, even breaching 65 to a dollar due to flows from FPIs into domestic equities. However, when it comes to debt, FPIs have so far been net sellers in October, by ~268 crore.

"The enhancement in FPI limits will not have a major impact on the rupee because it is a staggered approach. If such instances arise where the rupee appreciated significantly due to the flows, RBI might use that to boost foreign exchange reserves," said Brijen Puri, head of markets at JPMorgan.

Investors in corporate bonds have become cautious after Amtek Auto defaulted on ~800 crore of bond repayments last month. FPIs began buying corporate bonds because their limits for government securities had got exhausted.

“We might see some investors switching from corporate bonds to sovereign but only ~13,000 crore of sovereign limits have been made available for now, small compared to the ~187,000 crore current FPI investment in corporate bonds. So, don’t expect any major impact,” said Aditya Bagree, head of rates and credit trading at Citi India.

On SDLs, low liquidity is the nature of the market. Investors such as provident funds and insurance companies prefer to hold the bonds till maturity. These investors look for a safe investment with a steady stream of income; they're not keen in trading in these.

According to bank treasury executives, most state governments issue 10-year paper. As a step to improve liquidity, states could issue bonds with varying maturities such as five years and even long-duration paper of 15 years. This would also help develop the yield curve.

For FPIs, the central bank will be increasing the investment limit for government securities to ~179,500 cr by January 1 from the existing ~153,500 cr