FIIs make aggressive bids for Indian debt on rate cut hopes.

MUMBAI: Signalling an increase in demand for Indian debt, foreign investors bid aggressively for investment limits auctioned by market regulator Securities Exchange Board of India on hopes of better policy environment and reduction in interest rates.

Against overall investment limits of Rs 16,550 crore in government and corporate bonds, foreign institutional investors bid for Rs 21,535 crore, a 30% oversubscription. For long-term government bonds with a minimum residual maturity of five years, FIIs put in bids worth Rs 12,094 crore against limits of Rs 10,264 crore.

Bond market experts attributed the success of the auction to FIIs' anticipation of likely trading gains in light of a probable interest rate cut by RBI in January because of moderating inflationary expectations, apart from a need by sovereign and pension funds to diversify their portfolios. Bond yields and prices move inversely.


When yields fall, traders gain as bond prices rise and vice versa. "With inflation reading coming lower and overall growth trending lower, a rate cut in January may be a given, so there is an opportunity to make trading gains (in categories where there is no duration limit)," said Sandeep Bagla, executive vice president, ISec Primary Dealership, "We have seen good interest from long-term investors like sovereign wealth funds and central banks this time."

The success of the current auction contrasts sharply with the one in September, where FIIs bid for Rs 13,255 crore worth of limits for long-term government bonds against Rs 23,488 crore on offer. The government allows FIIs to invest up to $65 billion in government and corporate bonds each year -- $20bn in the former and $45 billion in the latter.

The unutilised limits in categories such as new long term government bonds with restrictions on maturity, old government bonds and old corporate debt are auctioned in the second week every month.

According to Sebi guidelines, investors must utilise the limits they have bought in forty five days of buying the limits. This restriction is seen as an irritant by a lot of investors, as it mandates investment, irrespective of how yields on government bonds move, once the investor has subscribed to the limits.

Now, however, expecting interest rates to decline, investors have side-stepped this encumbrance.
In the category of government bonds with no tenor restrictions, there was over 50% oversubscriptions as investors bid for limits worth Rs 2,895 crore, against an investible limit of Rs 1,985 crore.

In its effort to channelize more funds in order to finance India's current account deficit, the finance ministry introduced two new categories of investment worth $5 billion in government bonds and corporate bonds each, with no tenor limit or restrictions on holding bonds.

But only long term investors like sovereign funds, pension funds or insurance companies may be allowed to bid for these limits. Sebi is yet to come out with the final guidelines on this category of investments.


Source : economictimes.indiatimes.com