Foreign portfolio investors (FPIs), who have been large buyers of government bonds since the beginning of the year, are now steadily increasing exposure to less-liquid papers that offer higher yields as their risk appetite has increased and they are chasing better returns. For example, foreign investors hold about Rs 1,034 crore worth of the 10-year benchmark 6.79%, 2027 bond as on June 16, compared with about Rs 14,169 crore of the less-traded 8.83%, 2023 paper, according to data from the National Securities Depository.
The yield on the benchmark security was 6.47%, significantly lower than an yield of 6.79% on the 2023 paper.
At the end of trade on Monday, the total traded volume on the benchmark security was `9,530 crore, compared with `125 crore for the 2023 bond, data from the Clearing Corporation of India showed. “Yes, FPIs have been buying securities where the spread is higher by 20-30 basis points. In a bullish market, you typically have investors hunting for yields, and that hunt is on. They are buying securities of similar maturities where the yield is about 25 basis points higher, and the idea is to hold it for a year or so,” said Manish Wadhawan, managing director and head of interest rates at HSBC.
Traders said a large chunk of these less-frequently-traded papers have come into the market at the beginning of the current fiscal, when the state-run banks reshuffled their portfolio and sold these bonds to book profits.
The Reserve Bank of India gives banks the opportunity to reshuffle their bond portfolio at the beginning of a financial year and shift securities from the held-to-maturity (HTM) basket to the available-for-sale (AFS) and held-for-trading (HFT) baskets.
Indian bonds have rallied significantly in the last six-seven weeks on the back of benign inflation and expectations that the Reserve Bank of India will reduce the repo rate in the next monetary policy in August.
Since the beginning of May, the yield on the 10-year benchmark paper has fallen from 6.99% to 6.47%. This rally has given the state-run banks an opportunity to reduce their positions in these papers, traders said.
“This is a very good call on the part of FPIs. There are a lot of illiquid papers in the 5-10-year basket. It gives them the opportunity to increase their carry without increasing the duration risk,” a senior trader with a foreign bank said.
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FPIs have aggressively invested in Indian debt in 2017, taking the total investment to more then $13.3 billion till date. Last week, foreign investors likely bid for investment limits in Indian government securities worth about `16,708 crore in the debt investment limit auction conducted by the Bombay Stock Exchange.
By Shamik Paul