The Hindu Business Line : FIIs unlikely to rush for G-Secs, corporate bonds

Most FIIs use their individual limit by making investments in equities, as compared to G-secs or corporate bonds. Even the existing limits for bonds are not fully utilised

Mumbai , March 2

With no specific individual limit stipulated for equity and debt instruments for foreign institutional investors, the proposed hike in limit for FIIs in corporate bonds and Government securities in Finance Bill 2006-07 may not see foreign funds rushing to invest in G-secs and corporate bonds, say experts.

The Finance Bill 2006-07 proposed to hike the cumulative FII in Government securities from $1.75 billion to $2 billion. The FII limit in corporate bonds was hiked to $1.5 billion from $0.5 billion.

Mr Alok Vajpeyi, Vice-Chairman and Managing Director, Dawnay Day AV, told Business Line that most FIIs use their individual limit by making investments in equities, as compared to G-secs or corporate bonds.

The stock market benchmark index BSE-30 Sensex rose by 45 per cent in 2005 calendar.

"There are no individual limits for FIIs on debt and equity investments," he pointed out, but added that the hike was a "small step in the right direction." According to SEBI Web site, the cumulative FII investments in G-secs and treasury bills stood at $161.38 million as on January 25, 2006. In bonds, FIIs were net sellers to the tune of $ 1.24 billion in calendar 2005 while they were net buyers to the tune of $ 10.7 billion in the same period.

Cumulative FII investment in debt stood at $ 243.40 million as on March 1, 2006.

Mr Monish Tahilramani, Head (Markets) of HSBC India, said: "It has always been a calibrated approach by RBI and the Central Government in freeing up the Government securities and corporate bond markets for the FIIs".

He felt that at current levels of the rupee, FIIs may not be in a hurry to invest in the G-sec and corporate bond markets. "Even the existing limits are not fully utilised," Mr Tahilramani pointed out.

"Market conditions change and the rupee may become attractive," said an official in another FII, adding that at that time, the RBI and the Government may not find itself in a situation whereby they are unable to handle huge levels of inflows.

"This (the hike in limit) is a positive step that should provide a greater linkage to international interest rates, particularly at the shorter end of the interest rate curve," said Mr Raju Shukla, Singapore-based Managing Director for Barclays Capital's India investment banking business.

Adds Mr Madan Menon, CEO, Barclays Capital, India: "Prospective bank issuers into the domestic subordinated debt markets may see a broader window of appetite for their paper."

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