In a sharp contrast to the recent trend of exits from the debt market, investment limits in the government bonds found eager buyers among foreign institutional investors at an auction conducted by Sebi on Tuesday.
In fact for the $9.8 billion (R58,624 crore) worth of limits that were up for grabs, bids from FIIs totalled $10 billion (R64,908 crore). However, bankers said that not all the limits that are bought by FIIs turn into actual investments in the bond market as these limits are acquired at dirt cheap premium levels.
At the auction on Tuesday, the highest premium a FII was willing to pay was 0.8 basis points. The cutoff premium was 0.0026 bps. A basis point is one hundreth of a percentage point. ?The limits are like an insurances. If market conditions improve, FIIs would like to buy but they don’t set to lose anything if they don’t end up buying,? said Manoj Rane,
In the previous auction too on July 22, FIIs had lapped up most of the the around $4 billion worth of investment limits auctioned but at dirt cheap premium level of 0.001 basis point. After buying the limits at the auction, FIIs in fact net sold $1.25 billion worth of bonds thereafter. An FII has a 30-day window to invest in the government bond market after getting hold of limits.
FIIs have been net sellers of Indian debt since May 22 when the US Federal Reserve indicated it would start paring its quantitative easing programme. Since then, foreign investors have sold nearly $10 billion in domestic debt markets. This incessant selling is one factor that has driven sovereign bond yields up by a massive 200 basis points. Dealers said that the spike in bond yields over the last two days and the subsequent rally suggests that yields may have peaked and foreign investors could start buying again.
?The kind of surge bond yields have seen, these are good levels to buy. But until the currency shows stability, FIIs may not come,? said a bond trader at a foreign bank. The 10-year benchmark 7.16%, 2023 bond yield hit a five-year high of 9.47% in intra-day trade on Tuesday but closed below 9% after a significant rally in bond prices in the second half of trade. Bond yields eased as the rupee rebounded from intraday lows of 64.12/$ to close at 63.23/$.
Post market close, the RBI announced that it would conduct open market operations to the tune of Rs 8000 crore in long dated government securities on August 23rd.
“It is important to address the risks to macroeconomic stability from external sector imbalances. At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy, ” said the RBI in a release.