FIIs grab more debt limits on rate cut hopes

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SummaryForeign institutional investors grabbed more debt investment limits on Monday on hopes of making profits once bond yields start falling again due to expected rate cuts by the Reserve Bank of India.

Foreign institutional investors (FIIs) grabbed more debt investment limits on Monday on hopes of making profits once bond yields start falling again due to expected rate cuts by the Reserve Bank of India (RBI).

For the $3.30-billion (R17,661 crore) worth of debt limits in government and corporate bonds that were auctioned on Monday, FIIs offered bids worth $4.02 billion (R21,669 crore).

Premiums were largely similar to those in the previous auction. FIIs paid premium of 1.37 basis points for long-term government bonds, which typically see tepid demand. The highest premium offered by FIIs on the government bond limits was 3 bps. For corporate bonds, the highest premium payment offered was 12 bps and the cutoff premium was 7.25 bps.

In previous auction, FIIs had paid a premium of 1.0-1.53 bps for government bonds and 12.75-16.61 bps for corporate bonds. The RBI will detail its third quarter policy review on January 29, where it is expected to cut the repo rate by 25 bps.

As on December 30, FIIs had invested around $3.20 billion (R1,70,521 crore) in bonds, exhausting nearly 70% of their total debt investment limits. Foreign investment in Indian debt through various routes is capped at $66.5 billion (R3,17,212 crore), out of which the limit on direct FII buying of government and corporate bonds, including infrastructure bonds, is $42 (R2,51,090 crore). Provisional data from the Securities and Exchange Board of India (Sebi) shows that FIIs have invested $169 million in debt so far in January.

On Monday, the Sebi auctioned $2.54 billion (R13,707 crore) worth of limits in long-term government bonds wherein FIIs can buy bonds of only 3-year and above tenure, $736 million (R3954 crore) worth of limits in corporate bonds that have no tenure restrictions.

Limits in government bonds without tenure restrictions due to unavailability of free limits. Sebi auctions debt limits only when available limits are more than R1,000 crore in any given category.

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