India’s recent move to raise the investment cap on government bonds for what some view as longer-term investors should further drive allocations to these assets, say custody executives.
On January 29, the Reserve Bank of India doubled the total investable amount to $10 billion from $5 billion for foreign central banks, multilateral agencies, sovereign wealth funds, insurance firms, pensions and endowments. At the same time, it reduced the cap for foreign institutional investors (FIIs) outside this category by $5 billion to $20 billion.
The recent changes to FII limits came amid the recent emerging-market sell-off. In the first week of February, FIIs pulled $465 million out of Indian debt assets and $266 million from equities. Despite this, the rupee has been more resilient than other EM currencies such as the Indonesian rupiah, Argentine peso, South African rand and Turkish lira.
While the Indian currency suffered its biggest fall since 1993 to 68/dollar on August 29 from around 53 on February 10, it has since recovered almost 10% to 62.06 as of yesterday.
While the central bank did not clarify the rationale behind the moves to alter FII limits, they are seen as an attempt to encourage longer-term, ‘stickier’ capital into the debt market.
Last year RBI governor Raghuram Rajan criticised “bond tourists” – his label for short-term debt investors – after the withdrawal of a net $8.2 billion from Indian bonds between June and August.
Despite the seemingly low cap, only 20-25% of the previous $5 billion investment limit allowed for this sub-set of investors had been used, notes Aashish Mishra, India head of Citi’s securities and fund services.
“Only a quarter of the original $5 billion has been used, but the move by the RBI to double the investment amount is a positive signal aimed at attracting long-term investments from this category of investors,” says Mumbai-based Mishra. “It also demonstrates the flexibility of the government to raise the caps whenever there is a need to meet growing demand by the FIIs.”
Even before the cap changes came in, Mishra says he had seen greater interest from sovereign wealth funds, endowment funds, pension funds and central banks in allocating more to Indian fixed income and equities.
“These investors have also started making visits to India and have shown interest in the country’s bond market, including evaluating and meeting with companies,” says Mishra.
Anand Rengarajan, India head of direct securities services at Deutsche Bank in Mumbai, confirms he has seen new investors making preparations to enter the Indian market towards the end of 2013 and early this year.
Moreover, FII assets under custody (AUC) rose sharply across the board last year, adds Mishra. (It should be noted that these figures cover all asset classes and reflect market appreciation as well as flows.)
In 2013, the total AUC of FIIs in the category including SWFs, foreign governmental agencies, central banks and international/multilateral organisations more than doubled to $23 billion from $11 billion, according to data from Citi.
In the same period, AUC of investors in the segment including pension funds, insurance/reinsurance firms and endowments more than doubled to $20 billion from $9 billion.
That said, total AUC of FIIs in other categories shrank 4% to $193 billion from $201 billion last year, mostly due to a decline in AUC of debt investments.
“The measures by the Ministry of Finance and Sebi [the Securities and Exchange Board of India] over the past year to make the Indian market more accessible to these types of long-term investors is one reason for their increased interest,” says Mishra.
One effort by New Delhi to streamline India’s investment framework is the introduction of its foreign portfolio investment (regime, which is expected to come into effect by April. It will unify the various approval and registration mechanisms for FIIs and qualified foreign investors (QFIs).
Launched in 2011, the QFI programme is a streamlined approval process for foreign investors. Unlike FIIs, QFIs do not have to get approval from Sebi before investing into India’s capital market; they rely on assessment by qualified custodians.