FIIs hit government securities limit, switch to corporate bonds

MUMBAI: Absence of room in the government bonds market is seeing overseas investors picking up quasi-sovereign securities such as state-owned Rural Electrification Corp, Power Finance Corp and Power Grid Corp, narrowing the credit spread between these papers and government notes.

Experts said the momentum is likely to sustain despite a possible shift by yield-driven investors to the US market once rates are hiked there.

Spread, or gap, between triple-A rated corporate bonds and the benchmark papers has now contracted to 40-45 basis points versus 60-70 bps last December. A basis point is 0.01 of a percentage point.

“FIIs have come in hoards to invest in top-rated corporate bonds in the absence of G-Sec limits,” said Shashikant Rathi, senior vice-president and head of investments, ALM and capital markets at Axis Bank. “The momentum is likely to continue despite the expected US rate hike and opening up of more GSec limits as domestic interest rates would remain in falling interest rate regime, giving existing investors opportunity to book profit.”

According to Rathi, Indian yields are also much higher than US or German yields, which attract them amid a stable exchange rate.

The 10-year benchmark bond is yielding 7.80% compared to 2.19% from US Treasury with similar maturities. German bonds are at 0.67%. This caters to an opportunity for interest rate arbitrage between India and those countries, especially when the exchange rate looks stable.

Foreign portfolio investors have so far exhausted more than 77% of the $51-billion investment limit for corporate bonds. It was 58% at the beginning of the year.

Foreign portfolio investors in Indian debt have taken a longerterm view on Indian interest rates, dealers said. Overseas investment in government bonds is almost near the $30-billion ceiling.

“Many FPIs from Southeast Asia are sitting on the sidelines, expecting more policy action the world over. With follow-on volatility, eventually the focus would return to boost India’s growth,” said Ajay Manglunia, senior VP (fixed income), Edelweiss Securities. Even if G-Sec limits are opened for investment, they will be filled up soon as investor appetite is very high.”