Ripples Advisory, Bond yields may fall on RBI tweaks in FPI norms
New rules may improve market sentiment as they are favourable for foreign investors
Domestic bond yields could fall on expectations that foreign portfolio investors (FPIs) will resume buying Indian debt, bond dealers said, after easier investment rules announced on Friday. This may also lift some pressure on the rupee, which has been falling against the dollar.
The Reserve Bank of India (RBI) late on Friday withdrew a rule that mandated FPIs to invest in government bonds with at least three years of residual maturity. Also, FPIs are free to buy corporate bonds with at last one year residual maturity, against three years earlier.
According to bond dealers, there is little appetite for Indian bonds among foreign and domestic investors now.
This is because of higher yields owing to uncertainty over interest rates, falling rupee and volatile external factors such as rising crude oil prices and US bond yields.
FPIs have been net sellers in the Indian debt market for the past two months and the trend is expected to continue in April.
The new rules are likely to improve market sentiment as they are favourable for foreign investors. This, in turn, should generate demand for bonds from other domestic investors, dealers said.
“It will help improve the current market environment. And FPI flows in debt market may return because foreign investors have always preferred the 1-3 year maturity investment bucket. Corporate bond supply may also increase in this bucket on expectation of higher FPI demand, which may lead to a fall in yields by at least 25-30 basis points on immediate basis,” said Jayen Shah, head of debt capital markets at IDFC Bank.
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