RBI and the ministry are in the final stages of discussions for increasing the FPI limits from April 1, 2018.
New Delhi: The finance ministry and the Reserve Bank of India (RBI) are likely to agree on raising the FII investment limit of 5 per cent in government bonds to 6-7 per cent, official sources indicated.
The government and the RBI are actively considering increasing the foreign portfolio investment (FPI) limit in long-term government securities (G-Secs) to 6-7 per cent and eventually to 10 per cent over a period of time after a longer horizon, sources indicated.
Recently, while announcing borrowings for 2018-19 first half, economic affairs secretary had said both RBI and the ministry are in the final stages of discussions for increasing the FPI limits from April 1, 2018.
With India offering one of the highest yields in Asia, the Indian debt market has become a hot destination for foreign portfolio investors (FPIs). Foreign investors are positive on Indian debt and would like to invest as the differential between Indian bond yields and US treasury yields are widening, which makes the Indian debt appealing to foreign institutional investors (FIIs).
It is the right time to increase the FPI limit as they can bring a depth in the debt market as well, said the sources, adding that due to frauds and provisioning for bad debts, banks have been hit by a fund crunch and are shying away from investing in G-Secs. The government too has fewer options as banks are not flush with funds, a market player said.
Research firm Nomura had said that a 1 per cent increase in the FPI cap, from 5 per cent to 6 per cent would increase the limit by Rs 80,000 crore in absolute terms.
National Securities Depository data says as of March 26, FPIs have invested Rs 1.84 lakh crore in dated central government securities.
Foreign portfolio investors’ investments in the Indian debt market have crossed a record $19 billion in 2017. In chase for high yields, foreign investors having nearly utilised the investment limits available in both quotas — central government securities and corporate bonds.
The Indian debt market had witnessed a net outflow of $6.45 billion in 2016. The latest depository data shows that the general category FPIs have utilised 96.99 per cent of the permitted limit of Rs 1.87 lakh crore in central G-Secs while long-term FPIs have utilised 83.12 per cent of the allotted limit of Rs 54,300 crore. At the same time, foreign investors have utilised 98.57 per cent of the permitted limit of Rs 2.44 lakh crore in corporate bonds.
“Key trigger for Indian markets in FY19 could be political developments and outcome of large state elections like Karnataka, Rajasthan and Madhya Pradesh,” Chordia further said.
Adding to the woes is global factors like rising interest rates and tensions over global trade war between the US and China. The US Fed rate hike could disrupt the FPI flows into emerging markets.
Over the past few years, the emerging markets have been seeing huge inflows driving markets higher. A weaker US dollar and hunt for better returns drove money into emerging markets with global investors’ emerging market exposure reaching the highest level since April 2015 the last year.
Further, a rise in Brent price beyond $70 may negatively hamper both fiscal and current deficit and in addition to that the recent increase in trade protectionism measures by USA is likely to be a risk for global equities especially if it is followed by EU and other nations. For the Indian market, strong domestic flows have supported the market against foreign fund selling.
The rally in Indian equities in FY18 has been led by strong liquidity support from the domestic investors. Domestic flows into mutual funds rose to $20.5 billion in FY18 as compared to $7.6 billion in FY17. “In this background, India needs domestic flows led by SIPs to sustain in coming months,” Chordia said.
“We advise investors to increase allocation to large caps given the relative undervaluation compared to the mid and small cap space. Our preference would be for companies focused on Rural spending (tractors, farm products), travel/leisure and evergreen stocks (Consumer facing stocks),” he added.
Though Indian marco outlook is improving there are issues especially fraud hit Indian banking sectors. Some of the foreign brokerages have turned negative over this issue.
Goldman Sachs downgraded its forecasts for India's economy on Tuesday in the wake of a more than $2 billion fraud at Punjab National Bank, warning it could spark tighter regulation of the banking sector that would constrain credit growth.
In a note to clients, Goldman Sachs lowered its real gross domestic product (GDP) forecast on India for the year to March 2019 to 7.6 per cent from 8 per cent earlier.
Goldman, which forecasts the Indian economy to grow 6.6 per cent in the current fiscal year which ends in March, said it retained its 2019/20 growth forecast at 8.3 per cent.
“Markets and investors are questioning whether the problem is more systemic,” Goldman analysts wrote in the note, referring to the PNB fraud, adding that markets feared the fraud would likely offset some of the positive effects of the bank recapitalisation and hit overall credit, investment and GDP growth.
“We expect a similar kind of returns from equity markets during the next fiscal too but with increased volatility due to large political events. While risk of higher yield may continue to persist in year ahead, we believe a healthy double digit growth in corporate earnings will aid markets to sustain high valuations,” said Rakesh Tarway, research head, Reliance Securities.
Factors to watch during FY19 are hardening of US Fed rates and movement of crude prices. Hardening of rates by US Fed may impact flow of global liquidity to emerging markets. On the brighter side, earnings growth, which was a drag in the first two quarters due to demonetisation and Goods and Services Tax (GST) rollout, was promising in quarter ending December 2017. Experts believe that an economic recovery is on its way and that should help corporate earnings grow in double digits in FY 19.
There is still uncertainty regarding how the US markets will unfold and the impact of trade wars if it heightens, but more or less the same has been factored in and therefore the markets should perform better than what the majority are expecting on the Street. It’s time to be patient and look out for sectors such as pharma, IT, NBFCs and good quality private sector banks. Investors should deploy a part of their capital in good quality stocks at current levels, said Jimeet Modi, founder & CEO, SAMCO Securities.