There were inflows in the G-Sec category in July, bucking the trend of outflows up to June this year. Likelihood of a sovereign ratings upgrade for India and a possible hike in FII investment limit helped spur interest in the segment.
Up to June, there were outflows to the tune of R2,351 crore in Gilt funds. In July, however, there were inflows of R110 crore, data collated from Amfi shows. In the year to date, the category has seen net outflows of R2,241 crore — much below the inflows of R500 crore in the same period last year. Last year, Gilt funds saw outflows in four of the first seven months. The AUM of gilt funds as on July 2014 stood at R5,645 crore.
On Thursday, foreign fund Franklin Templeton reportedly bought bonds worth about R16,000 crore on hopes that a rating upgrade was in the offing. Last week, global rating agency Standard & Poor’s had told a news agency that it was evaluating policies of the BJP government for a review of India’s sovereign rating, now pegged at the lowest investment grade.
Experts say an upgrade is likely to spur more interest. “The India story looks more compelling to FII investors. Inflation may fall and interest rates are likely to soften. This bodes well for the bond market as prices will move up. I expect more large investments in G-Secs,” said Mahendra Jajoo, an independent analyst.
There has also been some talk of an increase in FII investment limit of $30 billion in government securities, which reached about 97.5% by another $3-5 billion. “The outlook is starting to look good. Oil prices are falling, so is inflation and the deficit. So far, FIIs have bought about 97.5% of the debt limit and about R3,400 crore is left. If the debt limit is raised, you will see more inflows,” said Arvind Konar, head of fixed income at Almondz Global Securities.
“We continue to expect Delhi to raise FIIs’ on-auction G-Sec limits by $5billion to $30billion, doing away with the separate limit for sovereign wealth funds (SWFs), within the overall $81-billion FII debt limit,” said a Bank of America Merrill Lynch report.
The brokerage said the hike will help raise FX reserves to guard against contagion. It said FII inflows into G-Secs are easier to attract, as the RBI rate cycle is peaking, and higher FII inflows into