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
asasmal@microsec.in Microsec Research reports are also available on Bloomberg <MCLI>
24th September’ 2010 Microsec Research

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

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24th September’ 2010 Microsec Research