Domestic markets stabilise, foreign debt ceilings to be raised - DB Research

Fading external risks and the Reserve Bank of India's (RBI) recent bunched-up rate cut stoked a relief rally in the Indian financial markets. With the US Fed expected to remain in the waiting-mode for longer (see last two days' Dailies), benchmark SENSEX equity index is up nearly 5% since late Sept. Bond yields slipped by a percent towards 7.55%, while the rupee recovered to a two-month high yesterday.

This upbeat mood was also reflected in the foreign portfolio flows, as investors returned after a two-month hiatus. Month-to-date, foreign investors are net equity buyers of USD 171mn, while debt outflows thin out. Notably, foreign debt flows are becoming increasingly important, as these outpaced incremental equity flows in the past two years. Rate cut expectations, stable currency, strong captive domestic demand for government debt papers and economy's improved external balances have been key draw factors.

Our Rates strategist also maintains that the markets are likely to factor in the probability of further rate cuts (keeping yields low), irrespective of whether RBI eases or not. This implies that in total return terms, INgov bonds are likely to continue outperforming its US counterparts and spreads are bound to compress in the quarters ahead.

Debt inflows are meanwhile likely to receive a further boost, after the RBI raised investment ceilings. Following RBI's announcements, the securities regulator outlined details this week. The ceilings will henceforth be denominated in In­dian rupees and fixed at 5% of the outstanding debt issuance, to be reviewed every six months. Additionally, such investments will also be capped at 20% of the outstanding stock of the security.

In material terms, the current total limit of INR 1.5trn will be raised to 1.7trn from 12 Oct (~USD 3bn total increase) and further to 1.86trn in Jan16. Of these, INR 366bn and INR 441bn (by 12 Oct and Jan16 resp) are set aside for long-term investors (i.e. sovereign wealth funds, insurance and pension funds etc.). A separate limit was also set for state development loans, which is expected to be raised in phases to reach 2% of outstanding issuance. With the state govern­ments' fiscal metrics on the mend and a bigger say on their finances, foreign investors' appetite for these papers are also likely to be strong.

Source : Equity Bulls

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