An auction for purchases of limits to buy gilts worth Rs 6,666 crore on Monday attracted nearly twice the subscription from foreign portfolio investors (FPIs). Given the huge appetite that FPIs displayed, market experts expect a big chunk of the bonds to be bought. Should that happen, the Indian currency could appreciate further since almost $2 billion could flow in. A total of 78 bidders tried their luck at Monday’s auction compared with just 38 in the previous auction held on December 18. The rupee closed at 63.50 to the dollar on Monday, after hitting a high of 63.25, the highest in two years and eight months. On Friday, the rupee had closed at 63.37. It has put on 0.58% in the 2018 sessions against the dollar on the back of a 6.7% gain in 2017. Between the debt and equity markets, FPIs invested close to $30 billion 2017. Foreign investors put in bids worth Rs 11,988 crore ($1.88 billion) against a notified amount of Rs 6,666 crore ($1.05 billion) . At the previous auction, FPIs had bid for limits worth only Rs 4,061 crore against a total notified amount of Rs 3,074 crore.
The highest bid at Monday’s auction was at 5.10 basis points whereas at the December 18 auction it was 2.5 basis points. The cut-off at Monday’s auction was 3.33 basis points where at the previous auction it was 1.8 basis points. The yield on the old benchmark closed Monday’s session at 7.34%; the yield on the newer benchmark ended the day at 7.13%. Auctions for bonds — whether gilts or corporate bonds — are conducted when investment limits get freed up either due to redemption or sales in the market or additional limits are introduced by the government. The Reserve Bank of India (RBI) had recently upped the investment limits in G-secs by Rs 1,600 crore for general category FPIs.
Bond dealers said the aggressive bidding is the reflection of new year optimism as foreign investors are armed with fresh allocations for investment. “This is the first auction of G-sec limits in the calendar year when FPIs are usually allotted fresh allocations. Furthermore, yields are also trending at attractive levels. As a result, we saw a good demand by FPIs. However, foreign investors will be keenly waiting for the CPI inflation data that is due to be released on Friday,” a bond dealer pointed out.
Market participants indicated that FPIs tend to hold on to the acquired investment limits, without actually utilising them to buy into bonds, if an important economic data is set to be released. This is reflective in the inflows following last week’s corporate bond limit auction. FPIs had over-subscribed the quota available for auction, putting in bids worth Rs 15,961 crore against a total of Rs 13,756 crore.
However, despite such optimism, fund flows into the Indian debt segment remained muted in the days after the auction which indicates foreign investors are not utilising their limits just yet. Though nearly $2 billion of corporate bond limits were acquired during Wednesday’s auction, only about $70 million of cumulative inflows (corporate bonds + G-secs) have come into Indian debt over the two days after the auction.
“It is quite possible they are waiting for the inflation data on Friday. That could be a direction provider for the yields going ahead,” said a money market expert.