Although foreign investors flocked to add Indian government bonds to their portfolios in the quarter ended June 2017, the domestic investors, mostly state-run banks, shunned away from the sovereign bonds. This revelation comes at a point when yields on Indian sovereign bonds soared dramatically on 3 July 2017. The yield on a new 10-year government of India bond jumped 11 basis points to 6.62 per cent from its close of 6.51 per cent on 30 June 2017.
Between April and June 2017, foreign funds added bonds worth more than Rs 42,200 crore to their portfolios while state-run banks sold bonds worth more than Rs 95,200 crore during the same time. The reason for the different strategies is the future gains that these investor classes foresee.
The reforms ushered in by the Narendra Modi-led government, the fairly stable currency exchange rate in India and the relatively high bond yields make the foreign investors bullish on Indian sovereign debt, while the state-run banks are cautious on these bonds as RBI is expected to cut key rates in its next monetary policy in August and due to the uncertainty arising from the recently announced farm loan waivers, against which the central bank had warned in its last monetary policy meeting.
While on Monday, the yields of the government of India bonds rose sharply as the Reserve Bank of India late on Friday announced an open market auction of bonds worth Rs 10,000 crore. This announcement surprised traders, who were expecting the auction to happen in August around the time when RBI is supposed to pay a hefty dividend to the government.
Traders said the open market sale appeared intended to help offset bond redemptions of Rs 52,620 crore due on 9 July, with another Rs 30,300 crore in August, which would have added liquidity to the financial system.
“It looks like they are timing it with bond redemptions,” a senior dealer at a foreign bank told Reuters, noting that the overall impact of the open market bond operation would likely end up being broadly neutral on liquidity.
Traders expect the central bank to conduct at least two to three more open market auctions in the July-September period given the surplus liquidity of around Rs 3 lakh crore in the banking system, much above the RBI’s traditional tolerance level of Rs 1 lakh crore.