Mumbai: Foreign investors on Monday oversubscribed by three times the enhanced limit in government bonds made available to them and, in addition, bought more than ₹ 1,000 crore of bonds issued by state governments, indicating the attractiveness of state-backed Indian papers.
The Reserve Bank of India (RBI) had in its latest monetary policy on 29 September said that the debt limit of foreign portfolio investors (FPIs) would be denominated in rupees instead of dollars and foreign portfolio investors (FPIs) will be allowed to hold up to 5% of total government debt by 2018.
In addition, FPIs would also be allowed to hold 2% of the outstanding state development loans (SDLs), or bonds issued by state governments, which amount to ₹ 50,000 crore.
For FPIs, which had almost exhausted their government securities (G-secs) investment limit of $30 billion, the rupee conversion opened up an additional limit.
As per the rules, FPIs can freely invest in G-secs, but have to bid once their total investment crosses 90% of the limit.
On Monday, FPIs had to bid for ₹ 5,600 crore of bonds. Data showed that they put in bids to the tune of ₹ 17,500 crore.
For the ₹ 5,600 crore of limits auctioned by the BSE, the highest bid was 85 basis points, which means an investor is ready to pay 85 paise to reserve her right to buy ₹ 100 worth of bonds.
The cut-off bid came at 66 basis points.
The bids are the highest so far in this financial year and show the eagerness of foreign investors to pick up Indian debt. One basis point is one-hundredth of a percentage point.
“There was a lot of pent-up demand for these bonds as the auction came as a bunch in a structured manner," said Harihar Krishnamurthy, head of treasury at First Rand Bank.
FPIs also bought ₹ 1,000 crore of SDLs from the secondary market, bond traders said on condition of anonymity. The investors took interest in the SDLs issued by Maharashtra, Gujarat, Kerala and Tamil Nadu.
The average yield was at 7.93% for the 10-year papers of these states.
The yield is only about 36 basis points higher than the benchmark 10-year G-sec that closed at 7.57%.
“The spread is fine and the amount is really impressive considering it is only the first day," said Prasanna Patankar, head of treasury, G-sec trading desk at STCI Primary Dealer Ltd, an underwriter of government bonds.
On Tuesday, 14 state governments are scheduled to sell ₹ 15,636.80 crore of loans to investors.
“The auction will easily sail through," said Patankar, considering the interest shown by FPIs in the segment.
Even as foreigners cannot buy beyond their limit, domestic investors will now find these bonds attractive, said bond investors.
“The state loans are backed by a government guarantee anyway. It is a good investment option for FPIs," said Patankar.
“Long-term investors such as pension funds are rent-seekers. They will park their funds wherever they find yields to be attractive and secure. It shows the attractiveness of the country’s financial profile, no matter what others have to say," said Soumyajit Niyogi, rates analyst at SBI DFHI Ltd, another underwriter of government bonds.