BackFII debt auction continues to draw strong interest
Foreign funds agree to pay a 7 bps premium for the right to buy Rs5,510 crore worth of govt debt with bids totalling Rs6,809 crore
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Mumbai: Foreign institutional investors (FIIs) have continued to bid aggressively for the right to buy government bonds in India, results of an auction conducted on Tuesday showed.
Foreign funds agreed to pay a 7 basis point premium for the right to buy Rs5,510 crore worth of government debt with bids totalling Rs6,809 crore. One basis point is one-hundredth of a percentage point.
This is higher than the 4 basis points premium FIIs paid to buy Rs7,152 crore of bonds in the last auction on 11 June, indicating demand for Indian paper is still quite high.
Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd, said FIIs are seeking to buy government bonds with an eye on higher yields and expected events in the local market.
“The 10-year bond yield has inched up since the last auction, making bonds more attractive and hence, FIIs are willing to pay a slightly higher premium," Krishnamoorthy said.
The yield on the 10-year benchmark government bond has increased to 8.73% now from 8.53% in the last auction, making it slightly more attractive for foreign investors.
“They (FIIs) also have an eye on the budget in the next week, where if the government announces a lower borrowing target, it will lead to a lower supply of these bonds," Krishnamoorthy said.
The Narendra Modi-led government will announce its maiden budget on 10 July. There are expectations that reform measures, such as lowering government stake in some public sector enterprises, will be announced, reducing the government’s need to borrow from the market.
The FII limits in local government bonds have to be auctioned because over 90% of the current $20-billion cap has been taken by foreign investors.
Data from the National Securities Depository Ltd (NSDL) show that until 30 June, 94.46% of the total FII debt limit in government bonds had been used.
However, recent FII outflows from the government debt market have made some room for fresh investments. In a report released on 27 June, Andre de Silva and Himanshu Malik, analysts at Hong Kong and Shanghai Banking Corp Ltd (HSBC) pointed out that in the week ended 21 June, $502 million of government bonds were sold, the first such outflow since April.
“This was also the largest weekly outflow from government bonds in 2014. Intensifying concerns over rising food and crude prices rather than the expectations of a reformist budget due 10 July are clearly driving investors," the analysts said in the note.
However, total outflows from the local debt market, including corporate bonds and shorter tenure commercial papers, are much slower, data from the Securities and Exchange Board of India (Sebi) show.
In the two weeks to 27 June, $262 million of Indian government and corporate paper has been sold by FIIs. The outflows pale in comparison to the $10.41 billion of inflows into the local debt market till 27 June this year. During the same period in 2013, $1.26 billion was pulled out from the local debt market.
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