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Event Note Govt Raises Fii Limit G Secs & Corporate Bonds


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Event Note Govt Raises Fii Limit G Secs & Corporate Bonds

  1. 1. Event Note: Govt raises FII limit in G-Securities & Corporate bonds Event: The government on 23rd September’10, raised FII investment limit in the debt market to USD30 Bn (INR136 712 crore) from USD20 Bn (INR91 141 crore) and slashed its (INR136,712 (INR91,141 borrowing plan by INR100 Bn in H2’11. Impact: We believe this move is going to have a positive impact on the Indian debt market. FIIs can now invest USD10 Bn in the government securities market instead of USD5 Bn and pump USD20 Bn into the corporate debt market, up from USD15 Bn. However, in the corporate debt market, they can pump the additional USD5 Bn only into bonds of infrastructure companies with a maturity of five years or more. FIIs have so far invested about USD17.2 Bn in the debt market. They have touched the USD5 Bn limit in the government securities market and is about to meet the USD15 Bn limit in the corporate bond market. We expect a limited impact of this on the corporate bond market in the mid term. However higher limit would give a major boost to infrastructure funding as large portion of fresh debt issuance would come from infrastructure companies and the money would directly go towards execution of projects. In the government securities market where FIIs have already touched USD5 Bn limit, we may see some short rally in government bond prices. This may help the banks who holds significant portion in government securities to earn Mark-To- Market (MTM) profit. On the other hand Govt has slashed its H2’11 borrowing programme by INR100 Bn, which may lessen the supply of bonds in the market. This would result to an increase in bond prices and softening of bench mark bond yield This also helps Banks in MTM profit For yield. profit. infrastructure companies whose corporate debt paper yield is based on benchmark yield , this step means lesser burden on them as outgoing interest will be lower. We see this as an early stage of development of India’s debt market. However over-exposure to FIIs money (which are not sticky in nature historically), may increase interest outflow and make the domestic debt market vulnerable. Again, more FII money coming into the market will also boost domestic currency. Any excessive appreciation in INR may hurt export sector. Analyst – Abhisek Sasmal 033-3051-2000 Microsec Research reports are also available on Bloomberg <MCLI> 24th September’ 2010 Microsec Research
  2. 2. Pressure on 10 yr 10 year Benchmark yield % Benchmark bond 8.2 yield as Govt slashed its H2’11 borrowing 8 programme. However it is still 7.8 very lucrative for 7.6 FIIs as govt bond yields in other 7.4 developed market is 7.2 close to their all time low. 7 6.8 Apr‐10 May‐10 Jun‐10 Jul‐10 Aug‐10 Sep‐10 Source: Bloomberg, RBI Liquidity still tight which is preventing Banks in more Infrastructure lending Policy rates normalization INR Bn (LHS) 10% 9% 8% 7% 6% 5% 4% 3% 2% CRR Repo Rate Reverse Repo Source: RBI, Microsec Research Source: RBI, Microsec Research Trading in Corporate Bonds (in INR Bn) We expect this trend to reverse slowly as y 800 more and more debt 700 issuance from infra 600 companies to hit the 500 debt market. Less availability of bank 400 credit opens this 300 avenue for 200 corporates . Increase 100 in FII limit may help in this cause. 0 Source: SEBI, Microsec Research 24th September’ 2010 Microsec Research Research Microsec
  3. 3. Kolkata Investment Banking Azimganj House, 2nd Floor d 7, Camac Street, Kolkata – 700 017, India Tel: 91 33 2282 9330, Fax: 91 33 2282 9335 Brokerage and Wealth Management Shivam Chambers, 1st Floor 53, 53 Syed Amir Ali Avenue Kolkata – 700 019 India Avenue, 019, Tel: 91 33 3051 2000, Fax: 91 33 3051 2020 Mumbai 74 A, Mittal Tower, 7th Floor 210, Nariman Point, Mumbai – 400 021, India Tel: 91 22 2285 5544, Fax: 91 22 2285 5548 Email: Disclaimer This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as “MCL”) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at one’s own risk. MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation discussed herein or act as advisor or lender I borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. Neither the Firm, nor its directors, employees, agents, representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. 24th September’ 2010 Microsec Research