In what could pave the way for more foreign investment flows into India, the RBI has allowed foreign portfolio investors (FPIs) to increase gilt exposure up to 5 per cent of the total outstanding government debt. The move opens up almost ₹1.2 lakh crore worth of investments in the government’s debt securities. Bloomberg TV India discusses with Manish Wadhawan, Managing Director and Head of Interest Rates at HSBC, the implication of the hike in FPI limit for the debt market.

Big move from the RBI as the FDI limit gets opened up. What is the signal for flows?

I believe it is one of the biggest reforms for the markets. It is taking away all kinds of ambiguity. From that context, for medium-term perspective it is a very good thing. We expect all the limits getting nearly filled up in the next two-three days. In fact, it is divided into two parts. Long-term investors are allowed to buy from today onwards and the other investors will have to bid in the auction in the evening. So you would see the demand tomorrow. We expect 75-80 per cent of the limits will get filled up in two-three days on the debt side.

Where is the maximum interest in the bond market right now?

I think the maximum FPI interest would be seen in the 5-10 years segment. It offers a lot value for the foreign investors and there is definitely some interest in the longer end also. But that constitutes not more than 15-20 per cent of the overall market demand from the FPIs.

Where do you see yields headed from here given the rate cuts and big bond supply from government continuing?

With the 50 basis point cut in this policy, you can easily see that the stance of the RBI has completely changed and it is pretty dovish what the RBI Governor spoke after the policy. Yields have reacted downwards by around 15-20 per cent basis points post the policy and we see this kind of a trend continuing for some time.

The more important thing is they have put down new conditions as per SEBI guidelines, that the FPIs are not allowed to invest more than 20 per cent in a specific government stock. Taking a very generalist view on 10-year bond yield is a separate matter which is more related to domestic issues but FPIs are far more interested in spread papers where you get high yields. They would spread the buying because of regulatory reasons also. Net-net we expect that the bond yields would soften a bit more into December but the range for 10-year bond would we hovering around 7.35-7.60 in the next two-three months in India.

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