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The RBI last week made some tweaks in the investment limits of foreign investors in Indian bonds. This was done in a bid to bring more foreign flows into the country. But foreign investors who have not been too keen to lap up Indian government and corporate bonds are unlikely to take the bait.
Going by data put out by Clearing Corporation of India (CCIL) and National Securities Depository Ltd (NSDL), foreign portfolio investors (FPIs) have been utilising barely half of their investment limits in government bonds through 2019. In corporate bonds, too, their interest has been waning over the past year, with only 58 per cent of their limits used up in January. Risk of fiscal slippage, hardening bond yields despite RBI’s operation twist (simultaneous sale and purchase of government bonds) and rising inflation are factors that are possibly dampening investor sentiment.
Hence the RBI doubling the investment limit under the Voluntary Retention Route (VRR) to ₹1.5 lakh crore, and increasing the short-term investment limit for FPIs to 30 per cent from 20 per cent, are unlikely to result in a gush of foreign flows into the Indian debt market.
Weak interest
Through 2019, FPIs used up only 48-54 per cent of their investment limits in government bonds. This despite the sharp rally in bond prices -- yield on 10-year government bonds fell by a sharp 90 basis points during 2019 (bond prices and yield are inversely correlated). While they were net buyers to the tune of ₹25,800 crore in 2019, they appear to have been not too gung-ho to buy Indian bonds. In fact, they have been net sellers over the past three months (to the tune of ₹12,250 crore in January alone).
The interest has been particularly tepid in the ‘long-term FPIs’ category (that include Sovereign Wealth Funds, Endowment Funds, Pension Funds etc.). Here, the FPIs utilised less than one-third of their investment limits through most of 2019. Currently (as on January 29), FPIs have utilised only 48 per cent limits in government bonds and 58 per cent in corporate bonds.
Currently, the investment cap for FPIs in government bonds is ₹4,29,500 crore across categories and, for corporate debt securities, it is ₹3,17,000 crore.
Limits raised
The RBI has increased the FPI limit under VRR to ₹1.5-lakh crore from ₹75,000 crore. VRR was introduced last March. Essentially, it is a carve-out limit available to FPIs wherein conventional regulatory norms do not apply. For instance, investments made through VRR are not subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits, etc.
Of the VRR limit of ₹75,000 crore, about 72 per cent was utilised as of December 2019. Doubling this limit may not make a significant impact on flows until investor interest returns.
The RBI also increased the short-term investment limit for FPIs. Currently, short-term investments (up to one year) cannot exceed 20 per cent of the total investment in either Central government securities (including Treasury Bills), State development loans or corporate bonds. This limit has been increased to 30 per cent.
Given that there are growing concerns on fiscal deficit slippage and sharp rise in borrowings in the next fiscal, foreign investors may not be in a hurry to lap up their limits.
Inclusion into global bond indices?
Some market players are of the opinion that the RBI’s relaxations are more towards prepping the pitch for Indian bonds’ inclusion into global bond indices. Currently, India’s representation in such indices is relatively small compared to other emerging markets. The IMF’s global financial stability report had stated that the renminbi-denominated government and policy bank bonds, added to the Bloomberg Barclays Global Aggregate Bond Index starting in April 2019, could bring $150 billion in additional inflows to China by 2020.
Other emerging markets, including India, could see a reduction in flows. Hence, laying down a roadmap for inclusion of Indian bonds in global bond indices remains high on the government’s agenda.
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