Bond holders could see windfall gain with hike in FPI limit

Mumbai: It’s a case of favourable tailwind. Indian investors in government bonds are in for a treat with foreigners lapping up fixed income like never before. Investors see the 10-year Indian government bond doing well as the rates market will still price in some degree of further easing (yields track repo rate).

Treasury experts said the 10-year government bond yield is expected to move lower towards 6 per cent in the next 15-18 months. Bond prices rise in proportion with drop in yield. This is how investments in bonds see appreciation in value.

Bond yields will react to further rates cut as well. In the September quarter, the yield on a 10-year G-sec softened 32 bps (basis points). One bps is equal to 0.01 per cent. Quantum Mutual Fund’s fixed income head Murthy Nagarajan said he expected further rate moves post-April 2016. “By then, the fiscal policy for FY 17 would be clear and the initial monsoon forecast would have been released. If favorable and one which provides comfort to meet the 5 per cent January 2017 target, we should expect a further 50-bps rate cuts in CY 2016,” he said.

Besides, a hike in FPI (foreign portfolio investor) limit for bonds also resulted in more inflows, leading to greater demand for government bonds in debt markets. According to HSBC, offshore investors bought $1.7 billion of INR bonds during the week ending October 14. Foreign investors received a $2.5 billion debt investment quota on October 12, of which 70 per cent was utilised in just three days. The remaining investment debt quota is available only for government securities (G-sec) investments ($700 million) and is likely to be fully utilised in the next 1-2 weeks, given the strong demand, according to a note by André de Silva, head of global EM rates research, The Hongkong and Shanghai Banking Corporation Limited.

“The hike in FPI limits for bonds should result in inflows into bonds. India bonds still offer a relatively high real rate within the region and the Indian rupee has been the best performing currency this year adjusted for volatility,” said Hak Bin Chua, ASEAN economist, Merrill Lynch (Singapore) in a note.

In Asia, India debt market has been the best performer delivering a total return of 4.8 per cent in the year-to-date period, according to Bank of America Merrill Lynch. The yield on India’s 10-year benchmark bond on Monday closed at 7.57 per cent, more lucrative return than similar bonds in China and Malaysia where yield is 4 per cent or even less.

In its policy rate meeting on September 29, the Reserve Bank of India (RBI) surprised the market with a 50-basis point repo rate cut. The RBI also put in a framework to hike FPI limits in bonds. The new FPI limits will be announced in bi-annual phases (but released every quarter) to 5 per cent of the outstanding stock of G-sec by March 2018. This should open up room for additional investment of $18 billion over and above the existing limit, industry experts said.

Experts, however, cautioned that risk to this trade on the external side will be the impending Fed hike later this year. On the domestic side, unfavorable supply-demand dynamics and further weakening of the rupee are the biggest risks.