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FPI investment in corporate bonds hits over two-and-a-half-year low

Bhavik Nair

Foreign portfolio investors (FPIs) investments in Indian corporate bonds have hit over a two-and-a-half year low after falling below the $27 billion-mark in December. FPIs have utilised only 58.36% of the investment limits available, NSDL data shows.

Experts indicate that after the NBFC default crisis, foreign investors are avoiding exposure to papers that are not of high quality. On top of it, liquidity still remains a concern in the Indian corporate bond market.
As Manish Wadhawan, independent fixed income and currency expert, points out, post the IL&FS credit default last year, the impact has resonated across the credit space, especially the non-banking and finance companies (NBFC) names.

"FPIs have been reducing exposures in troubled names and are left with the option of buying only select good quality public sector unit (PSU) and banking names. However, there are restrictions that prevent them to take more than a certain exposure due to prudential limits. The appetite of foreign investors for Indian corporate papers have reduced in recent times," Wadhawan said.

It is interesting to note that FPI investment limits remain unutilised even for the government securities segment. Government securities are considered to be risk- free investment. According to NSDL data, general category investors have utilised just above 75.29% of the investment limits available.

In April 2018, the central bank had notified that no FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate, and in case an FPI has exposure in excess of 20%, it shall not make further investments in that corporate until this stipulation is met. However, earlier this year, the RBI relaxed the rules.

Gopikrishnan MS, independent market expert, believes that although some of the stringent measures introduced by the central bank on FPI investment in corporate bonds were changed, foreign investors seem to have lost appetite for Indian corporate bonds. "What is happening right now is that FPIs are not reinvesting the money that comes out of redemptions. Another issue is the credit quality of Indian papers. Although the NBFC crisis seems to have happened long time back, they are still not out of the woods. Default worries continue to linger in their minds,"
Gopikrishnan said.

Manish Wadhawan further explains that a lack of incentive to run large arbitrage books has also had its effect on short term fund flows into India. "With nil or negligible arbitrage left between onshore and offshore forward premia, the incentive to run large arbitrage books has come down in current times, thus impacting short term flows into India. This further reduces the incentive for FPIs to take positions in corporate bonds," he said.