FIIs reluctant to invest in Indian debt market

However, foreign fund managers feel things are not that bad. “With triple A rated companies able to source rupee funds at around 13-14 per cent and with a three year rupee hedge costing around 5-6 per cent a year, investors can still get a dollar return of around 8 per cent. This is respectable. But there is also a fear of further fall in interest rates,” said an FII source.

Another reason for the cool response on the part of FIIs is appreciation of the rupee against the dollar the US currency has fallen from Rs 35.80 level to Rs 35.70 within three months . With the dollar remaining weak against the rupee, return on investments made by FIIs has also come down.Similarly, withholding tax has cut into investments in debt. As most of the FIIs investing money in India are registered in Mauritius, they had to pay withholding tax on income earned from investments. However, it is learnt that Mauritian authorities are likely to relax the tax norms in the near future.

As a result of various problems, market sources don’t rule out the possibility of some FIIs diverting money meant for investment in Indian debt to other countries. On the other hand, the Indian debt market offers vast scope for FIIs as over 150 Indian companies have planned private placement of bonds and non-convertible debentures worth over Rs 25,000 crore in the next few months.

As per the SEBI norms, any registered FII willing to make 100 per cent investment in debt securities will be permitted to do so, subject to specific approval from the SEBI as a separate category of FIIs or sub-accounts as 100 per cent debt funds. In the case of ordinary FII investment, there is a ceiling of 30 per cent on debt instruments.

FII investment in debt through 100 per cent debt route will be subject to an overall cap of $ 1-1.5 billion for investment by all FIIs. Such investments in debt would be without any restriction on maturity of the securities or limit on the money deployed.