But debt inflows may take time to resume.
The Securities and Exchange Board of India (SEBI), the capital markets regulator, on Friday further relaxed the process for foreign investors to access Indian debt markets by doing away with debt auction mechanism for investing in government debt.
This means, foreign institutional investors (FIIs) and qualified foreign investors (QFIs) can now invest in government debt without purchasing debt limits through the existing auction mechanism till the overall investment reaches 90%.
“Once this 90% limit is reached, auction mechanism shall be initiated for allocation of the remaining limits that are currently in place for FII investments in corporate debt,” Sebi said in a statement.
Friday’s decision is likely to help attract inflows once FIIs’ interest in Indian government debt returns, experts said.
Suyash Choudhary, head of fixed income at IDFC Mutual Fund, believes that the move is a logical progression of the regulator’s efforts to make operational access for FIIs more painless.
“This would greatly simplify the access mechanism for FIIs and would help in attracting investors once their interest revives in the bond segment. Currently, the FII participation is not there; so, this step in itself wouldn’t help bring inflows,” Choudhary said.
Foreign investors have been consistent sellers in the Indian debt market for the last three straight months, and have net-sold debt securities worth Rs 882 crore so far this month.
The narrowing spread between the US treasury yield and the benchmark Indian 10-year government bond, along with volatility in the rupee, has been responsible for outflows from the Indian debt market.
Currently, though 88.28% of the limit has been exhausted, only 50.7% of the $25 billion upper limit to invest in government debt is being utilised by FIIs. Also, the $5 billion additional limit for Sebi-registered FIIs under the categories of sovereign wealth funds, endowment funds, insurance funds, pension funds, so on, has seen only 10.38% utilisation.
Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Company, believes that though Friday’s Sebi step is in the right direction, it may not help much in attracting foreign fund inflows, if FIIs go by other considerations such as the level of risk, rate of return and outlook for interest rates in India.
Earlier, FIIs/QFIs, in order to invest in government debt, were required to purchase the debt limits through the auction mechanism which was administered by the Sebi on a monthly basis.
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