Exactly a year ago, foreign portfolio investors, or FPIs, were falling over each other to get a morsel of Indian government bonds.
The interest-rate trajectory was tilted downwards, the exchange rate was being managed deftly by the Reserve Bank of India (RBI) and the yield differential between India and the US wasn’t looking to narrow any time soon.
This was a perfect setting to invest in risk-free government bonds, and a common grouse heard on the Street was that the limits were very restrictive.
What foreign investors didn’t want was corporate bonds. The investment limit was used up only 66%, with an outstanding investment of about Rs1.6 trillion.
Fast forward to today.
While interest in government bonds has sustained, there is a frenzy in picking up corporate bonds. The outstanding investment now is around Rs2.24 trillion, with 92% of it being used up.
For the first time in four years, the investment limit for corporate bonds would be auctioned by stock exchanges as the threshold of 90% has been hit. According to rules set by the Securities and Exchange Board of India, or Sebi, once the investment limit utilization hits 90%, the rest of the available space is put up for auction.
Why is there such an interest in corporate bonds? To be sure, corporate bonds have caught the fancy of foreign investors only since January. In the past six months, investors have bought a whopping Rs54,000 crore worth of corporate bonds. This, despite investment limits in government bonds being hiked at regular intervals, thus creating space for more investment there.
Indeed, at the centre of the buying is the chase for yields. Indian bonds provide some of the highest yields among emerging markets, rivalled perhaps only by Indonesia. At a yield of about 6.51%, the 10-year benchmark Indian government bond is second to none among emerging markets. On an unhedged basis, the 10-year government bond can fetch a return of 4.5-5% for a foreign investor and a corporate bond gives an even higher return of over 6%.
What is interesting is the kind of bonds foreign investors are buying. Custodian banks suggest investors are taking exposure to the fast-growing affordable housing market, by buying bonds of housing finance firms. Other non-banking financial companies are also hot favourites.
Given that the Indian corporate bond is more ruthless than the loan market while pricing credit and anyone rated below “AA” doesn’t get a toehold, foreign investors are assured about the safety of their investments.
Bonds issued by non-financial companies, too, are being bought albeit only of those that have a high rating. That leaves out issuers who are currently labelled as stressed in banks’ books.
