Mumbai: The Reserve Bank of India (RBI) on Thursday allowed foreign investors greater freedom to buy Indian corporate bonds, giving them a chance to purchase more short-term paper.

The central bank removed short-term investment and concentration limits from its rules governing foreign investments in corporate bonds. This, it said, will provide greater ease of investment to foreign portfolio investors (FPIs). 

Before the removal of restrictions, FPI investments in corporate debt with residual maturity up to one year could not exceed 30% of the total investment in corporate bonds. Similarly, the concentration limit meant that corporate bond investments by foreign investors were limited to 15% of the limit for these bonds for long-term FPIs and 10% for other FPIs.

Positive move

Experts said it was a positive move for the Indian corporate bond market and, especially, for lower-rated instruments and short-term debt paper. 

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“The idea is to attract more foreign investments into corporate bonds,” said Venkatkrishnan Srinivasan, founder of financial advisory firm Rockfort Fincap LLP. However, for foreign investors to be interested in corporate securities, the local yields have to be attractive, he said. 

According to Srinivasan, the current spread between the Indian 10-year Gsec and the 10-year US Treasury is about 200 basis points (bps) compared with 250-300 bps a year ago. This, he said, has historically been around 400-500 bps and has shrunk over the period due to India’s inclusion in JP Morgan and Bloomberg index funds, besides other positive factors.

While the US is rated AAA, India is at BBB-, the lowest investment grade by global rating agencies and something the government has been unhappy about. A shrinking spread does not give adequate incentive to a foreign investor to invest in a country where the credit rating is lower than the US. 

Foreign investors have a lot of room for investments in Indian corporate bonds. As on 7 May, FPIs have utilised 14.5% of their aggregate corporate bond investment limit of ₹7.6 trillion, showed data from NSDL. This was at 15.71% on the same day last year. 

Others said that investments into the country were quite tightly controlled earlier by the central bank, preferring long-term flows over short-term. 

“The spread between the US 10-year and our local government bond is quite low. After India got included in the global indices, there are fair chances that most of the flows from FPIs into bonds would come into G-secs so that they can rebalance portfolios under the passive route, as to maintain India’s weight in the indices,” said Ajay Manglunia, a fixed income specialist. 

Manglunia expects more investments into higher-yielding non-banking financial companies (NBFCs), real estate entities and promoter financing deals after this route is opened up. India could see additional flows of ₹1-2 trillion over the next one or two years, he said. 

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“So far, money was coming via the VRR (voluntary retention route) where investments have a three-year lock-in. While those that have already invested in VRR have to remain invested, incremental investments may attract the general route in corporate bonds, now that the tenor and concentration restrictions are removed,” he said.

Introduced in 2019, the voluntary retention route is meant to encourage FPIs planning long-term investments. Through this route, FPIs were given more operational flexibility through the choice of instruments and exemption from some regulatory norms. Of the ₹2.5 trillion limit through VRR, almost ₹2 trillion has been allotted to investors.