India Bonds Are So Hot to Foreigners They've Bought All They Can

  • Wednesday’s company debt quota sale oversubscribed 1.4 times
  • Overseas corporate debt holdings approaching $51 billion cap

Overseas investors just can’t get enough of Indian bonds.

Attracted by one of the highest yields in Asia, foreigners bid for 104.42 billion rupees ($1.6 billion) of corporate debt quotas, exceeding the 74.18-billion rupee target and taking inflows to near the overall cap of $51 billion. On Tuesday, the government got bids for 1.3 times the quotas being offered, exhausting 99.63 percent of the cap on sovereign debt.

The success of the quota auctions means global funds don’t have much room to add to their purchases, undermining ongoing borrowing plans of companies. The nation’s caps on foreign ownership of its debt have been a sore point with fund managers chasing returns in one of the world’s fastest-growing economy.

“Companies should be able to access capital at lower rates, and given the size and liquidity of the local corporate market, without controls,” said Kenneth Akintewe, senior manager at Aberdeen Asset Management Plc in Singapore. “A good starting point would be to remove the limits on corporate bonds.”

Wednesday’s sale was the first for corporate debt after the market regulator in November 2012 allowed global funds to invest without seeking approval until overall holdings touched 90 percent of the cap, a limit that was raised to 95 percent last week.

Foreigners own about 7.5 percent of India’s government and corporate debt, compared with 30 percent in Indonesia and Malaysia, according to Aberdeen Asset. Even China has intensified efforts to draw overseas investors to its onshore debt market, kick-starting a trading link with Hong Kong this month.

‘Wasted Opportunity’

Indian policy makers have been reluctant to ease the curbs to shield markets against capital outflows as global central banks prepare to unwind stimulus.

“I look at it as a wasted opportunity -- investors want to invest more, but India is turning them away,” said Jan Dehn, London-based head of research at Ashmore Group Plc, which has $58 billion in assets. “India could have lower yields, which will benefit the government and corporates, if they let foreigners become more involved in the bond market.”

Even so, the relatively higher yields offered by Indian debt is a magnet for offshore funds. The top-rated 10-year local company notes pay 7.51 percent, compared with 4.83 percent in China. The nation’s 10-year sovereign bond yields 6.45 percent, the highest among major Asian markets after Indonesia.

Read: Buy India Trade Gets Hotter as RBI Dovishness Boosts Inflows

Foreigners have raised holdings of local government and corporate bonds by 166 billion rupees in July -- a sixth month of inflows -- lifting this year’s total purchases to 1.33 trillion rupees, data compiled by Bloomberg show.

The highest fee bid at Wednesday’s sale was 12.01 basis points, indicating strong demand, according to data on the National Stock Exchange. The cut-off fee was set at 8 basis points.

“There’s big demand from foreigners for emerging-market bonds because the outlook for fixed-income in developed markets is becoming less rosy,” Ashmore’s Dehn said.

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