India: Foreign Ownership of Corporate Bonds Reaches the Limit
Since November 2016, Foreign Portfolio Investment in Indian corporate bonds has been rising at a fast pace and currently it stands almost at the limit of 2.44 trillion INR (38.2 billion USD). The Indian government is facing trouble tackling this excess demand and in July it suspended the issuing of corporate bonds for foreign investors as investment reached 92% but this did little to curb the interest in these type of bonds. The FPI investments since then have rarely moved from the 99% utilization level.
The high demand for Indian corporate bonds is not surprising given the fact that they provide significantly higher returns than these of other big economies and rank well even in comparison with emerging markets. The stable economy and market environment are also contributing to the huge interest in Indian bonds from abroad. Government bonds, which are the ones usually preferred by investors due to their less risky nature, are constantly purchased to the limit which also pushes the demand toward corporate ones. The 10-year benchmark yield of India stood at 6.6% in July, which is a marked decline compared to 2016 when it was almost constantly over 7%, but still notably higher than other big economies.
The demand in corporate bonds has had implications over other macro indicators. Foreign reserves reached a record high of 25 trillion rupee (393.7bn USD) in June 2017 and the Indian rupee has appreciated up to 6%. Although rising reserves and inflow of foreign investments are generally regarded as positive signs to policymakers, further appreciation of the rupee might harm India’s competiveness in the long term. For now, the RBI is not showing signs of reaction to the issue, but cutting policy rates and lowering real rates are possible tools.