RBI widens FPIs’ investment scope in local corporate debt

RBI widens FPIs’ investment scope in local corporate debt

Mint Street late on Tuesday raised the incentive for Corporate India to tap the bond market for its working capital needs, allowing foreign portfolio investors (FPIs) to invest a fifth of their total corpus in less than one-year residual debt papers sold by local companies.

The latest directive extends last week’s concessions that effectively enhanced shortterm GSec ownership by overseas funds. Although the policy maker has not raised benchmark rates yet in Asia’s third-biggest economy, the cost of funds at the short end of the yield curve has accelerated much faster than the long end, threatening to increase working capital expenses in an economy where the weighted average cost of capital trends higher than developed countries.

“In order to bring consistency across debt categories, it is stipulated that investments by an FPI in corporate bonds with residual maturity below one year shall not exceed, at any point in time, 20 per cent of the total investment of that FPI in corporate bonds,” the Reserve Bank of India (RBI) said late Tuesday.Before this change, FPIs were only permitted to invest in corporate bonds with minimum residual maturity of three years or above. They are now being allowed to invest in securities of less than one year, with up to 20 per cent of their corpus.

“More companies may tap the corporate bond market to meet their working capital requirement as we see overall demand to be improving in shorter maturity for carry trades,” said Ajay Manglunia, executive vice president at Edelweiss Financial Services. “FPIs are allowed to invest a decent portion of investments into less than one-year corporate bonds. This (the latest move) will create additional demand for shorter maturity papers.

”RBI last week eased investment norms for overseas funds after weekly sovereign bond auctions partially failed to elicit investor interest. It allowed FPIs to invest in treasury bills and shorter maturity sovereign debt instruments in its latest move to ease foreign investment rules. RBI had liberalised FPI limits in government securities on Friday, allowing such investors to invest 20 per cent of their total deployment in GSecs. Tuesday’s notification brings corporate bonds on a par with government securities

.However, investors who have more than 20 per cent of their investments with less than one year residual maturity, as on May 2, 2018 (beginning of day), have to bring such share below 20 per cent within a period of six months.

The Economic Times, New Delhi, 02nd May 2018

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