Bond Investors Get Access to $16 Billion More of Indian Debt
The RBI raised limits for overseas investors that could lure $16 billion of additional funds into India.
(Bloomberg) -- India’s central bank raised limits for overseas bond investors that could lure $16 billion of new funds, the third policy move in two weeks to spur demand in the nation’s debt markets.
Foreign investors will be allowed to increase holdings by 1.04 trillion rupees ($16 billion) for the fiscal year to March 2019, the Reserve Bank of India said in a statement Friday. It raised the limits for sovereign debt by half a percentage point, while changing how much investors can own of corporate bonds to 9 percent of outstanding notes from a fixed amount.
Prime Minister Narendra Modi’s administration is seeking to revive a sovereign debt market that had sold off for seven months, with the higher yields threatening his borrowing plans. Having one road map for all of the nation’s debt markets will help the RBI better manage foreign inflows, though traders were expecting a higher limit for government notes.
“While marginally positive, we don’t see the increase in sovereign bond limits as a game changer,” said Teresa John, an economist at Nirmal Bang Equities Pvt Ltd. “Incremental inflows will be much lower this year given the global background of rising interest rates.”
Foreign investors bought 1.4 trillion rupees of bonds in 2017, the highest since 2014. While they still purchased 95.24 billion rupees in January, they became net sellers in the last two months amid concern of an oversupply of debt and higher global yields.
The benchmark 10-year yield gained one basis points to 7.19 percent on Monday. The bonds posted their best gain since November 2016 last week after the central bank lowered its inflation forecast. Average yields on top-rated 10-year corporate bonds declined 39 basis points to 7.78 percent last week.
Overseas investors can boost holdings of sovereign debt to 5.5 percent by March 2019, and 6 percent a year later, according to the RBI. The central bank also set 9 percent as the limit for foreign investors to own in debt sold by Indian companies.
“The government and the RBI have not increased limits proportionately across all debt segments because they don’t want a lot of foreign flow in one segment,” said Killol Pandya, head of fixed income at Essel Finance AMC Ltd. “Doing away with an overall limit for corporate bonds indicates that the government and RBI want foreigners participation in this debt to work in tandem with its market size.”
Trim Debt Sales
In the past two weeks, the government has trimmed its fiscal first-half borrowing plans to reduce debt supply, and the central bank allowed lenders to spread out bond-trading losses to spur demand. Sovereign debt rallied in March, the first month of gains in eight, after the changes.
RBI’s latest move may benefit corporate bonds, according to Ajay Maglunia, head of fixed income at Edelweiss Financial Services Ltd.
The corporate debt limit will probably be "utilized quickly as well since these help investors earn at least 50-70 basis points extra return than government bonds,” said Maglunia. “So those trying to maximize returns, and willing to take the credit call, will opt for corporate debt."
The RBI also announced that the limit for foreign investment in state development loans would remain unchanged at 2 percent of outstanding securities. It will discontinue existing sub-categories in corporate bonds and there will now be a single limit for such debt.
To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net, Divya Patil in Mumbai at dpatil7@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Neha D'silva at ndsilva1@bloomberg.net, Ravil Shirodkar
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