The RBI on Tuesday announced an increase in the foreign portfolio investment (FPI) limit in government securities in a phased manner, which is set to reach 5% of the outstanding stock by March 2018, thereby opening up an additional Rs 1.2-lakh-crore investment limit over the next two-and-a-half years.

The central bank also added that the limits for FPI investment in debt securities will henceforth be announced/ fixed in rupee terms. As of now, the existing FPI investment limit in G-Secs is Rs 1.53 lakh crore or $30 billion.

Moreover, the RBI permitted FPI investments in state development loans (SDLs), which will be increased in phases to a figure of 2% of the outstanding stock by March 2018. “This would amount to an additional limit of about R500 billion (R50,000 crore) by March 2018,” the release said.

It means that over the next two-and-a-half years, cumulative FPI investment limits into G-Secs and SDLs will be close to double the current limit of $30 billion allowed in G-Secs. Bankers are optimistic that foreign investor appetite for Indian papers will continue to remain robust.

Ananth Narayan, regional head of financial markets, South Asia at Standard Chartered, said currently, there is a definite appetite for Indian government bonds. “Rupee has been among the most stable currencies in the world over the past two years or so, and yields on rupee are still relatively high compared to global peers,” Narayan said.

He pointed out that as foreign holding in government debt increases to 5%, the need to ensure inclusion of Indian government bonds into global indices increases.

“Unlike Indian equity, Indian debt are off global indices, which could lead to volatility in debt flows.  There are solutions that achieve this index inclusion without compromising the objectives of the authorities, and these must be pursued,” he said.

According to the policy statement, the limits for the residual period of the current financial year would be increased in two tranches from October 12, 2015, and January 1, 2016. Each tranche would entail an increase in limits by Rs 13,000 crore for central government securities composed of Rs 7,500 crore for long-term investors and Rs 5,500 crore for others; and R3,500 crore for SDL open to all FPI investors.

“The appetite for SDLs can be mixed, since they do not come with an explicit sovereign guarantee. But again since the liquidity in SDLs is far better than corporate bonds, I think FPI appetite for this segment will be reasonable,” Narayan said. However, this might prove to be a dampener to FPI interest in corporate bonds that already is seeing a drag since the beginning of this fiscal year.

“Since the investment limit in government securities has been increased, corporate bonds may see a (relative) reduction in FPI interest due to the liquidity factor in G-Sec market,” said Manmohan Singh, head of debt capital markets, India and South East Asia at RBS.

The increase in limits will be announced every half year in March and September and released every quarter.

The apex bank also said it has been decided to permit Indian corporates to issue rupee-denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt ($ 51 billion at present). There shall be no restriction on the end use of funds except a small negative list and detailed instructions are being issued separately.

Mutual fund managers continued to maintain bullish stance on software companies, as they raised their total allocation in the sector to an all time-high of over Rs 40,500 crore in August due to depreciation in rupee.(Thinkstock)

Mutual fund managers continued to maintain bullish stance on software companies, as they raised their total allocation in the sector to an all time-high of over Rs 40,500 crore in August due to depreciation in rupee.

In comparison, equity fund managers deployment in software stocks stood at Rs 29,668 crore during August last year.

Industry experts said that fund managers raised their allocation to software stocks due to declining rupee against the US dollar.

Like exporters, IT companies earn majority of their revenue in dollars. Depreciating rupee means exporters get more rupee per US dollar.

As per the data available with Securities and Exchange Board of India (Sebi), overall deployment of equity funds in software stocks stood at Rs 40,602 crore in August compared with Rs 38,404 crore in the previous month.

Besides, exposure to software stocks was at 10.27 per cent in August against 9.40 per cent in the preceding month.

Furthermore, IT was the second-most preferred sector with fund mangers after banks.

However, fund managers have reduced their exposure in traditional investment sectors like banking stocks. Deployment of equity funds in banking stocks dropped to Rs 81,634 crore from Rs 85,329 crore during the period under review.

Among others, MFs have an exposure of Rs 33,170 crore in pharmaceuticals, followed by auto (Rs 27,912 crore) and finance (Rs 23,015 crore).

Indian rupee fell by Rs 2.35 during the period under review. The domestic unit is trading at 66.37 against dollar.

The BSE IT index grew 1 per cent per cent last month, while the BSE Sensex crashed by 6.5 per cent.

MFs are investment vehicles made up of a pool of funds collected from a large number of investors and invest in stocks, bonds and money market instruments, among others.

Rate sensitive sectors are back in focus after the Reserve Bank of India (RBI) surprised market analysts on Tuesday and cut repo rate by 50 basis points to 6.75 per cent from 7.25 earlier. (Photo: PTI)

Rate sensitive sectors are back in focus after the Reserve Bank of India (RBI) surprised market analysts on Tuesday and cut repo rate by 50 basis points to 6.75 per cent from 7.25 earlier. Post the announcement, rate sensitive realty, auto, bankex and infrastructure stocks moved in green.

The BSE Realty, BSE Bankex, BSE Auto were trading 0.83 per cent, 0.55 per cent and 0.18 per cent up at 1,352.98, 19,701.01 and 17,045.96 in the afternoon trade (at 12.25 pm). Sensex was up 0.26 per cent at 25,683.14.

However, the 30-share index was down around 1 per cent at 25,373 at 10 am. BSE Bankex, BSE Auto and BSE Realty were down 1.76 per cent, 1.71 per cent and 1.18 per cent, respectively, at the same time.

Jimeet Modi, chief executive officer, SAMCO Securities said, “We believe today’s policy action will significantly drive faster transmission to the end borrower, it will drive urban consumption and will drive growth in the rate sensitive sectors. We believe sectors such as housing finance, consumer lending, private banks will do well over the next few quarters. It might still take a while for the investment cycle to pick up since that is also a function of government reforms.”

Murthy Nagarajan, head, fixed income, Quantum AMC, said, “Few in the market expected a 50 basis points cut in today’s policy. And it doesn’t end there, the RBIs inflation forecast of 4.75 per cent for Jan-Mar 2017 quarter suggests further room for rate cuts in CY 2016.”

Here are five rate sensitive stocks on which market experts are bullish on

Mahindra and Mahindra
Recommended By: Sharekhan
Why Buy: Considering the below-par monsoon for a second year in a row, Sharekhan expects the weakness in the tractor segment to persist in FY2016. Although a sharp decline in the second half of 2015-16 is not expected given the low base of last year, a meaningful recovery in the segment would be delayed to FY2017. Hence, the brokerage house has cut its tractor segment growth estimates for FY2016.

In a research note, Sharekhan said, “Consequently, our earnings estimates for FY2016 and FY2017 have been lowered by 6 per cent and 3 per cent, respectively. However, given the expectation of a pick-up in the UV volumes (on the back of new launches) and a recovery in the tractor industry in FY2017, we have maintained our Buy recommendation on the Mahindra & Mahindra stock with an SOTP-based revised price target of Rs1,450 (vs Rs 1,550 earlier).”

Axis Bank
Recommended By: Angel Broking
Why Buy: Axis Bank’s healthy branch expansion has not only helped it maintain low cost deposits (CASA at a healthy 43%), but also improve its mix of profitable retail loans to total loan book from 20 per cent to 40 per cent. Focusing on secured retail products has aided bank to maintain relatively better asset quality with Net NPA ratio at 0.48 per cent in 1QFY2016. It is well capitalized with Tier I capital adequacy at 12 per cent positioning it strongly for growth and market share gains as GDP growth revives. On valuation front, bank is trading at 2.0x FY2017 P/ABV.

Larsen & Toubro (L&T)
Recommended By: Angel Broking
Why Buy: L&T’s strong bid pipeline, robust order book, coupled with comfortable deb-to-equity ratio suggest that the company will be able to attain its FY2016 order inflow and top-line guidance. Using SoTP valuation methodology, the brokerage house arrive at FY2017E price target of Rs 2,013. L&T is a proxy play for investors wanting to ride on the Indian infrastructure growth story.

Ashok Leyland
Recommended By: Angel Broking
Why Buy: Ashok Leyland would be direct beneficiary of medium and heavy commercial vehicles (MHCV) upcycle from which it derives about 90 per cent of revenues. MHCV would be the fastest growing automotive segment over the next two years (Angel Broking expects 17 per cent CAGR volume growth over FY2015-2017), as the industry is likely to reach pre downcycle levels by FY2018. Strong volume growth coupled with operating leverage and reduced discounts is likely to increase profitability by 5 times for Ashok Leyland over the next two years.

State Bank of India
Recommended By: ICICI Direct
Why Buy: Among PSU banks, the brokerage house continue to stick to the largest bank as it is a proxy to the economy in the long term. Post capital infusion, its tier 1 ratio was at 9.6 per cent as on Q1FY16. In a research report ICICI Direct said, “We factor in credit growth in line with industry and plans to raise capital via QIP this year. Asset quality has now shown signs
of increased pressure with stressed assets ratio (NNPA+ Std RA) at 6.5 per cent. We review our estimates and valuation and revise both lower to arrive at a target price of Rs 300 valuing the core book at 1.4x FY17E ABV and add Rs 44 for associate banks & subsidiaries (life and general insurance, AMC,etc) against Rs 374 earlier. We maintain ‘BUY’ for long term.”

(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online)