Will raising FII limit help?

K. Raghavendra Rao Mumbai | Updated on March 12, 2018

Market experts say the increase of FII investment limit in corporate bonds by a further $20 billion is not going to impact the market at all as the current limit itself has not been breached.

The increase in FII-limit is subject to investment in infrastructure-related corporate bonds.

The budget has raised the present FII limit of $20 billion to $40 billion. In fact, the last time when this limit was raised was in September 2010 when the earlier limit of $15 billion was raised to $20 billion.

“Though the move is positive there are issues,” said Mr K. Ramanathan, CIO – Single Manager Investments, ING Investment Management. “FIIs do not have the time or the inclination to do credit appraisal the way banks do as these bonds would be floated by SPVs specially created to execute infrastructure projects,” he added.

Experts said that only supranational agencies like IFC Washington with no commercial constraints and a development orientation are bound to invest in such corporate bonds.

“Investments would take place only if there are issuances and that will surely take time,” said Mr Arvind Chari Senior Fund Manager – Quantum Mutual Fund. “If infrastructure SPVs are able to attract funds through bonds, they would have a truly global and diversified funding profile,” he added.

The government has been contemplating for some time a debt fund sourced from various investors with an AUM in the range of Rs 40,000-50,000 crore based on the Deepak Parekh committee recommendations.

“If GDP has to grow around nine per cent, investments have to pick up and this would be proportional to the funding requirement and hence issuances in the corporate bond market,” said Mr G A Tadas, MD & CEO, IDBI Gilts.

Subsidy and deficit

Analysts are worried about fiscal deficit ballooning due to crude oil. “The net borrowing figure is over-optimistic and based on the assumption that revenue collection would make it up,” said a fixed income dealer on the condition of anonymity. “Last year Rs 3,000 crore was budgeted as oil subsidy whereas the deficit eventually touched Rs 1 lakh crore. Even if the government funds 50 per cent of the overall deficit it still means an additional outflow of Rs 47,000 crore and presents a strong case for diesel price de-regulation,” he added.

This year the Government has budgeted Rs 23,000 crore for oil subsidy and nobody knows who will foot the extra $30 for every barrel that India imports as India's crude basket has already touched $110 a barrel with only $80 a barrel hedged.

The fact remains that only good projects with good credit rating will see investments from FIIs.

Published on March 01, 2011

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