India's capital markets regulator, the Securities and Exchange Board of India (SEBI), said on Monday a $1.75 billion limit on debt purchases by foreign institutional investors (FIIs) would exclude corporate debt. "Investments by the FIIs through 100 percent debt route in dated government securities and treasury bills only will be reckoned for the purpose of monitoring of individual limits allocated to them," SEBI said in a statement.
Analysts welcomed the move and said it would result in buying by foreign funds, particularly in short-term corporate bonds, leading to a compression of spreads over government securities.
Following the announcement, the Reuters benchmark corporate bond yields in the one-year and five-year segments eased 5 basis points to 5.90 and 7.17 percent respectively. These bonds trade at spreads of 14 and 34 basis points respectively over comparable federal bonds.
"FIIs will predominantly look at the one-year and below segment for short-term arbitrage opportunities," said S.P. Prabhu, head of fixed income research at IDBI Capital Market Services, adding that they may restrict their investment to top-rated 'AAA' and 'AA+' papers.
Traders say foreign funds are lured by relatively higher interest rates in India and a strengthening rupee, which lowers their hedging costs.
Foreign funds have been steadily buying government securities, mostly 91-day and 364-day treasury bills, ever since SEBI allowed FIIs to increase their exposure in Indian debt to $1.75 billion from $1 billion on November 2, traders said.
Data from the capital market regulator showed foreign funds have pumped nearly $293 million into the debt market in November after making sales of about $243 million last month.
Prabhu said FIIs may also look at primary bond issues, which are expected to pick up in the coming months as companies seek funds for capacity expansion.