FIIs warm up to infra bonds, help firm up rupee

FIIs warm up to infra bonds, help firm up rupee

Mumbai: Foreign institutional investors (FIIs) expressed their eagerness to invest in Indian bonds by lapping up the new bond investment limit on offer, auctioned by market regulator Securities Exchange Board of India (Sebi) on Wednesday.

They committed to buy up to 20,469 crore of government bonds and up to 19,777 crore of infrastructure bonds.

Sebi offered government bonds of up to 28,496 crore and 31,387 crore in infrastructure bonds.

The market regulator periodically auctions the investment limit and FIIs have to bid to block the quantum they can invest.

The latest auction was done after the Reserve Bank of India (RBI) on 25 June allowed FIIs to invest an additional $5 billion in government bonds and relaxed the guidelines regarding the lock-in period in infrastructure bonds to one year from three years earlier.

While FIIs have always been enthusiastic about investing in government bonds, they shied away from increasing their exposures in infrastructure bonds due to the lock-in period. Bond dealers termed the latest auction results as impressive, given that FIIs bid for more than half of what was offered in the infrastructure segment. They typically don’t bid for more than 15-25%, or even less, said bond dealers.

The auctions indicate that RBI’s move in relaxing the norms were working in strengthening the rupee, the dealers said.

The local currency has been strengthening for the last few days on hopes that FIIs will be taking more interest in the bonds when the investment limit is auctioned.

After touching a record low of 57.30 on 22 June, the rupee has been strengthening after the investment limit on government bonds was increased and the guidelines on infrastructure bonds were relaxed by RBI.

The Indian currency closed at 54.49 to a dollar on Wednesday, weaker than 54.3725 on Tuesday.

Bonds have rallied in the last couple of days on increased FII participation.

The yield on the 10-year bond fell further to close at 8.156% on Wednesday from 8.176% on Tuesday.

“This shows that FIIs are interested in investing in India despite whatever rating agencies forecast. The India story is still intact if norms are favourable for FIIs," said Harihar Krishnamurthy, head of treasury for India at First Rand Bank. FIIs now can invest up to $20 billion in government bonds, up to $25 billion in infrastructure corporate bonds and up to $20 billion in other corporate bonds. FIIs so far have almost exhausted their $15 billion limit on government bonds but not much have been invested in infrastructure bonds.