Foreign institutional investor (FII) investments into the bond market have crossed the $21 billion-mark.
The outstanding FII investments hit the highest-ever level of $21.5 billion on May 23, 2011, according to Securities and Exchange Board of India (Sebi) data. Foreign institutions have bonds worth a net $632 million in May taking their total investment in the debt market to $3.6 billion in 2011 so far.
Market participants believe that the outstanding amount would comprise around $9 billion worth of government bonds and about $12 billion worth of corporate bonds. They point out that FIIs have been reluctant to buy the infrastructure bonds, which need to have a residual maturity of five years. Thus close to $25 billion worth of such bonds would be unutilised.
Ananth Narayan, regional head, fixed income and currencies, South Asia, said, ?There has been some interest since yields have been attractive. Rates for short term paper have seen a particularly sharp rise in the last few months and over the past year FIIs have preferred to buy paper of shorter duration. That is understandable because although a five-year paper can be hedged, fluctuations in the prices of bonds can result in the fluctuation of the valuation of the bonds.?
Narayan adds that should any unused quota of bonds without a restriction on the tenure be auctioned, it would definitely find takers, because typically fluctuations would be less with paper of shorter duration.?
Observes a dealer, ?The debt market wasn?t really offering too many arbitrage opportunities although yields were attractive.
However, in the last few days, the hedging costs or the dollar rupee forwards, have fallen dramatically, with the apprehension of a shortage of the dollar. It has made the returns on the bonds a little more attractive.?
In the Union Budget announcement for 2011-12, the finance minister had doubled the limit available for foreign investment in corporate debt to $40 billion from the current $20 billion. The additional amount was meant for investment in infrastructure bonds with a residual maturity of five years.
In fact, even when the government increased the limit for foreign investment in corporate bonds from $15 billion to $20 billion in September last year, the additional quota was reserved for infrastructure paper with a residual maturity of five years. Allocations for these bonds were auctioned in December last year.