The appetite of foreign portfolio investors (FPIs) for government securities (G-Secs) seems to have significantly weakened with the limits at Monday’s auction remaining undersubscribed.
FPIs bid for Rs 12,287 crore worth of securities against the notified amount of Rs 22,170 crore, as a strong dollar and high probability of an interest rate hike by the US Federal Reserve prompted foreign investors to cut positions and stay away from India and other emerging markets. The government’s decision to demonetise higher-denomination currency notes also weighed on the sentiment of foreign investors.
At the previous auction, FPIs had put in bids worth Rs 10,439 crore against a notified amount of Rs 12,715 crore.
So far this year, FPIs have been sellers in the secondary markets, net selling $3.01 billion in Indian paper since the beginning of 2016. In fact, since the beginning of October, FPIs have net sold debt securities worth $3.28 billion and were buyers in only 14 out of 40 trading sessions.
According to sources, the lowest successful bid on Monday came in at 0.0001 basis points, unchanged from the previous auction.
Also, the notified amount at the auction this time around at Rs 22,170 crore was much higher than the usual amount notified for such auctions.
Market participants pointed out that foreign investors have been cutting their positions in domestic debt for some time now, given that for most of them the year is coming to a close and they need to book profit on their investments.
This, along with the other factors such as the impending US Fed rate hike and the demonetisation, has combined to take net investment by foreign investors in Indian debt down to levels not seen since 2013, when the FPIs ended the calendar year net selling over $8 billion of Indian paper.
Despite FPIs cutting positions in domestic debt, yields on government securities have continued to decline as Indian banks have been buying a lot of gilts in the recent past, especially after demonetisation helped swell their deposit base. The higher deposit base pushed banks to buy more government bonds, which are perceived to be the safest of all debt instruments.
On Monday, the 10-year benchmark yield closed at 6.33%, rebounding from the 6.19% close on Thursday – its lowest close since April 2009. In fact, the yield has fallen by over 110 basis points in this fiscal year alone.
FPIs across categories are allowed to invest up to R1.48 lakh crore in central government securities. Auctions are conducted when the investment limits get freed up either due to redemption or a sell-off. Regulations say when 90% of the investment limit is reached, the rest of the limit has to be auctioned. According to data on the NSDL website, as on November 25, 84.24% of the investment limit had been utilised.
Foreign investors usually bid aggressively to acquire limits on G-Secs with the bid size mostly ranging in multiples of the notified amount.
Indian debt is deemed attractive by FPIs given lucrative yields; especially at a time when yields on sovereign bonds of some of the countries are in the negative zone.