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Tweaks Rather Increase In Debt Investment Limits Likely

Monday, January 12, 2015
By A Business Reporter

Speculation of an increase/ rejig in the debt investment limits for foreign investors is making rounds. This is not surprising after foreign debt inflows jumped to USD26bn last year, outpacing equity flows, a first since 2011-12. Rate cut expectations, macro stability, higher returns vs regional peers and improving economic fundamentals have increased the attractiveness of India’s government and corporate debt.

Last year’s strong inflows have nearly exhausted the debt limits for government bonds (see table) and the markets have been pushing for a relook into the limits. However, the probability of an outright increase in the USD 30bn investment limit in government bonds is very low. Authorities have long been wary of increasing foreign ownership in domestic bonds, to shield against market volatility and subsequent swings in yields. This has in effect limited the exposure of foreign debt interests in the sovereign space at circa 5% of total issuance, much lower than 30% in Indonesia and Malaysia.

While an increase is unlikely, rejig within existing limits is possible. This might involve carving out part of the unused corporate debt limit and shifting it to the government bonds category, specifically for the long-term investors. But the scale is unlikely to be significant as the underlying intent is to redirect the excess inflows into the corporate debt space as the government limits are used up. This has worked so far, leading to an increase in the utilisation rate to 60% by early- Jan, from a shade under 50% back inSep14 .

 While lack of liquidity in the secondary markets and a smaller pool of issuers remain a bugbear, nonetheless the authorities remain keen to deepen and develop the corporate bond market in the coming quarters.

Limits and utilisation rate of FII/FPI dept investments


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