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Thursday, October 6, 2022

RBI’s FPI invest sops unlikely to aid gilts mkt; inflows seen muted

Informist, Thursday, Jul 7, 2022


NEW DELHI – Market participants expected tepid demand for gilts from foreign investors despite Reserve Bank of India’s measures, announced Wednesday, to arrest the rupee’s slide through more forex inflows in fixed income, dealers said.


The central bank took steps to prevent capital flight from domestic markets as adverse global triggers pummel the exchange rate for the rupee. Globally, investors favour haven assets, driving up demand for the dollar on fears of an economic downturn caused by monetary policy tightening.


As on Jul 6, foreign portfolio investors pulled out $1.15 bln from Indian debt since the beginning of the Russia-Ukraine war on Feb 24.


Consequently, the Indian rupee has slid over 6.5% so far this year, slumping to a record closing low of 79.3025 a dollar on Wednesday.


The central bank decided to include all new issuances of the seven-year and 14-year tenor gilts, including issuances of 7.10%, 2029 and 7.54%, 2036 gilts, as specified securities under the fully accessible route.


However, FPIs are keen on securities maturing in under three years, with non-residents eager to avoid term risks in Indian debt. The 2029 bond is largely illiquid in the secondary market, pushing it out of favour with FPIs who may look to liquidate their gilt holdings rapidly, dealers said.


“There’s no interest in papers of these maturities. Most of the FPI interest will come directly into corporate debt of under one-year maturity since that path has also been opened up to grab inflows,” a dealer at a foreign bank said.


On Wednesday, the central bank also exempted investments by FPIs in government securities and corporate debt made till October from the macro-prudential short-term limit. These investments will not be reckoned for the short-term limit till their maturity or sale.


Under normal circumstances, FPI investment in government and corporate debt in the medium-term framework was subject to a macro-prudential short-term limit, which means not more than 30% of the investment each in government securities and corporate bonds can have residual maturity of less than a year.


Typically, corporate debt gives better returns over government debt of comparable maturities, something that may push commercial papers and certificates of deposit by AAA-rated companies in the forefront of FPI investment demand, dealers said.


“The current limits under FAR (fully accessible route) are already underutilised, around 30%,” a dealer at a private bank said.


There has been little adverse impact under the route due to global factors. Foreign investors held 514.76 bln rupees of central government debt under the fully accessible route on Jul 6, as against 491.06 bln rupees on Feb 23, the day prior to the outbreak of the war.


Moreover, the rupee’s continued slide puts India in a bad spot as an investment destination. Investors are likely to avoid rupee-denominated assets on fears of exchange-rate losses, dealers said.


The success of FPI investment may finally lie in RBI’s success in arresting the slide of the rupee while the broad-based risk-off sentiment continues to prevail in global markets.


The series of measures are likely to improve sentiment for the rupee in the near term, and lower the volatility in the currency’s exchange rate, analysts said.



US$1 = 79.18 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj



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Source: Cogencis

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