Even though foreign institutional investors (FIIs) have been net sellers of Indian bonds since late May, they continue to bid aggressively for investment limits in government bonds auctioned by Sebi.
At the monthly auction conducted by Sebi on Monday, bids from FIIs totalled nearly $4.50 billion at the auction where debt limits worth $4 billion were on offer. Interestingly, premiums paid to buy the limits rose to 0.05 bps, suggesting that interest may have revived marginally after last month?s global selloff in bond markets.
At the previous auction in June, FIIs had lapped up 93% of the around $7 billion worth of investment limits auctioned, but at dirt-cheap premium levels of 0.001 bps.
?It is literally a free auction. FIIs don?t mind paying a small price to get the rights to buy debt,? said Hitendra Dave, head of global markets, HSBC India. Dave added that not all limits acquired will turn into actual investment. For instance, after buying limits worth $6.5 billion at investment limit auction in June, FIIs have, in fact, net sold $3.4 billion worth of bonds thereafter.
Indeed, as on July 18, FIIs held unused debt investment limits worth nearly $6 billion. Foreign investors have used only 53% of the total $25 billion worth of limit available in government bonds. An FII has a 45-day window to invest in the government bond market after allocation of limits.
?It is an option to invest. But it is not necessary to invest,? said Jayesh Mehta, MD and head of treasury, Bank of America-Merrill Lynch.
Bankers also said FIIs prefer acquiring investment limits even when the intention is not to invest in the bond market as such limits come cheap. Ironically, FIIs had been willing to pay premiums as high as 15 bps to acquire limits at the auction on May 20. However, with the US Federal Reserve indicating a withdrawal in quantitative easing, FIIs started pulling out of Indian bond market from May 22 onwards.
Since May, FIIs have been net sellers in every single session and have pulled out $6.7 billion from the debt market. The incesseant selling of bonds by them had sent yields surging by over 50 bps in June and the rupee to an all-time low of 61.21/$.
Since then, the Reserve Bank of India has announced stringent measures to curb the fall in the currency by squeezing out liquidity intended to make rupee assets scarce and dearer and, thereby, avoid a build-up of dollar positions. Monday?s auction follows another sharp spurt in government bond yields after the RBI?s measures to rein in the rupee depreciation sent bond yields surging over 50 bps and money market rates spiked.
The rupee has since then recovered only marginally, but bond yields have remained elevated above 8%. FIIs need to bid for available investment limits in an auction conducted periodically by Sebi, pursuant to which they can invest in the bond market. Sebi auctions debt limits for FIIs is conducted on the 20th of every month.