Why foreign investors love corporate bonds

Higher yields, stable rupee make them attractive

That foreign investors like Indian bonds is well known. Only, their interest is spreading to corporate instruments from government bonds.

Going by National Securities Depository Limited data, since June, foreign investors have been on a buying spree, going beyond 90 per cent of the allowed cap. As of December 4, foreign investors had exhausted 95 per cent of their investment limit. Currently, the investment cap for FPIs in corporate debt securities is ₹2.27-lakh crore.

Easing rules

In September, the RBI opened more room for foreign investors to invest in corporate bonds. Until then, the limit for FPIs stood at ₹2.44-lakh crore, including ₹44,001 crore of rupee denominated bonds.

The move to exclude rupee-denominated securities meant overseas investors could invest ₹44,000 crore more in debt.

An additional limit of ₹27,000 crore became available from October and another ₹17,001 crore will open up from January 1.

Attractive yields

The high interest rates in India have been a draw for foreign investors. The ten-year government bonds today offer a yield of about 7 per cent; in the US similar gilts offer 2.3 per cent.

On a nominal basis, Indonesia also offers high rates on its 10-year bonds, at 6.5 per cent. With inflation around 3.3 per cent, the real returns work out to 3.2 per cent. The real returns on Indian bonds are about the same, at around 3.4 per cent.

The rupee has been one of the better performing Asian currencies, gaining about 4.6 per cent this year against the US dollar.

The hunt for higher yields appears to have turned foreign investors’ attention to corporate bonds. The average coupon rate of AAA-rated Indian corporate debt between January and December 2017 has been about 7.6 per cent.

“India is largely perceived to have strong macro-stability, courtesy prudent government policies and a reasonably high real rate framework. The currency has also been stable. The strong interest from offshore investors is now spilling over to corporate bonds with the sovereign limits exhausted,” says Suyash Choudhary, Head-Fixed Income, IDFC Asset Management Company.

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