By Ruma Dubey

While we are busy pursuing the ups and downs in the equity markets, there is almost a frenzy in the bond markets.

On 29th Sept, RBI declared its Credit Policy wherein the Governor announced that it will fix the FII limit in Govt bonds in rupee terms and will also allow overseas investors to hold up to 5% of outstanding stock in phases until March 2018.

This “phase” thing started on 12th Oct and on offer were Rs.13,000 crore or $2 billion worth of Govt bonds and Rs.3500 or $540 million worth state bonds . Additionally, the RBI also allowed for the first time, FIIs to invest in bonds issued by state govts; this too in a phased manner, starting at Rs.3500 on 12th Oct and totaling Rs.50,000 crore by March 2018. This limit is over and above RBI’s existing limit - $30 billion annually of which $25 billion is for FIIs and $5 billion for long term investors.

And when the counter opened on Monday, within two days, the limits were exhausted. So the debt market saw over $2 billion come in during the past seven days. And on the state Govt or development bonds front, yields are at 7.75%, 25 bps higher than sovereign bonds which offer 7.5% as state bonds are considered to be slightly more risky. But here too, FIIs have devoured almost all, 80% till last count of all that was on offer.

This comes contrary to reports stating that investors have pulled out an estimated $21 billion out of emerging markets debt in third quarter according to the Institute of International Finance. As against this, data from the National Securities Depositary showed that for the first nine months of this year, global investors poured $7.9 billion into Indian debt. Clearly, in emerging markets, India does stand out like a lone guiding star.

The FIIs are saying that in terms of bonds, India is possibly the best market given the relatively stable rupee, positive economic outlook, inflation under rein. Indian bond yields are also amongst the best in emerging markets at 7.5% v/s around 4% or even less in China and Malaysia. Brazil offers much higher at around 16% and Russia also at over 10%. But faith in these economies is not too high vis-à-vis India.

These reasons apart, with RBI ushering in a cycle of lower interest rates, yields could not have been any better. Bonds or debenture prices are inversely proportional to interest rates – when rates go down, bond prices rise. One thing seems certain now – rates will not be hiked further. When rates go up, Fixed Deposits (FDs) make more sense and bonds are a big no-no as their value only goes down with every rate hike. Thus when the rate cycle is set for a downturn, it is the perfect time to buy bonds and less of FDs.  Especially for those in the 30% tax bracket, investment in bonds at this juncture makes perfect sense, just like what the FIIs are doing.

At this juncture this is a good move by the RBI as more overseas funds coming in would mean that the value of our currency will remain in comfortable range. At the same time, over-reliance on FIIs to fund government bond market or corporate bond market should be avoided as it could topple the entire country in times of global crisis.

Like the FIIs, it is a good time to look at debt or bonds as a good investing option. As with equity, while investing in corporate bonds, pay attention to  - quality of the company, credit rating, returns after tax, whether or not the bonds are liquid enough – can you sell when listed? But more than looking at NCDs as a trading instrument look at them as an long term investment option and go for longer tenures because we are now at a falling interest rate cycle and longer tenure will earn you more.