FinMin expects FPIs to increase investment in corporate bonds

Mumbai: The Finance Ministry hopes that foreign portfolio investors' (FPIs) exposure to the domestic bond markets will rise from the present 65 percent of their permissible ceiling of USD 51 billion.

"Against the USD 51 billion ceiling that FPIs have, their coverage is only 65 percent now. With the ongoing reforms, especially after the Reserve Bank's August 25 circular, we are hopeful this gap will be filled," Ajay Tyagi, Additional Secretary, Investments, in Finance Ministry, told reporters.

Addressing the BRICS Bond Market summit here, he also said the government expects the recent decision to allow FPIs to invest in unlisted companies and securitised receipts, to boost their exposure to the corporate bond market.

The domestic bond market, excluding the G-secs, is worth around Rs 20 trillion, while the G-secs is a much larger one given the government's building debt-driven balancesheet.

"Foreign portfolio investors are already allowed to invest in unlisted companies so we hope that it goes through USD 51 billion total cap," he said.

However, he was quick to add that the RBI amendments are being examined now.

In its bid to deepen the corporate bond market, the Reserve Bank had on August 25 issued a circular that allowed banks to issue Masala bonds and also to accept corporate bonds under liquidity adjustment facility.

The changes were part of the slew of changes in the fixed income and currency markets.

"These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication," the RBI had said.

These measures were part of the steps taken by previous RBI Governor Raghuram Rajan for deepening the debt market.

Since July 1, 2016, BSE bond platform has become

operational for privately placed debentures. The amount raised on the platform is Rs 38,092 crore till date. Public issue of bonds in same period is Rs 19,700 crore. With this, the total amount comes to Rs 57,792 crore.

This has happened after new Sebi and RBI regulations promoting corporate bond market for large corporates.

To encourage the overseas rupee bonds market, banks are permitted to issue rupee-denominated bonds overseas (Masala bonds) for their capital requirements and for financing infrastructure and affordable housing. Currently, Masala bonds can be issued only by corporates and non-banking lenders like HFCs, large NBFCs.

The RBI will be seeking amendments to enable the central bank to accept corporate bonds under the LAF which is used to bridge temporary liquidity issues by lenders, it said.

To give an impetus to the bonds market, RBI had also decided to expand limit of partial credit enhancement (PCE) provided by banks.

"The aggregate PCE that may be provided by the financial system for a given bond issue will be increased from the present 20 percent to 50 percent of the bond issue size subject to the PCE provided by any single bank not exceeding 20 percent of the bond issue size and the extant exposure limits," the RBI had said.

The RBI has also constituted a working group to review the guidelines for hedging of commodity price risks by resident investors in the overseas markets.