FIIs pile into bonds on rate hopes

Written by Aparna Iyer | Mumbai | Updated: Oct 29 2014, 06:54am hrs
With the premium on dollars purchases three months ahead having dropped to a near-five-month low and non-deliverable forwards (NDFs) at a three-month low, its now cheaper for foreign institutional investors (FIIs) to hedge their bond investments, reports Aparna Iyer in Mumbai.

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Thats possibly one reason why FIIs continue to stock up on corporate bonds. They have bought $1.7 billion worth of corporate bonds so far in October, on the back of purchases worth $2.7 billion in September.

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The premium to be paid to buy dollars three months ahead has slipped to 7.92% in the onshore market and to a three-month low of 5.73% in the offshore NDF market. Currency dealers attribute the drop to increased hedging by exporters who sell dollars forward and thereby increase the supply of the greenback. They also point out that the RBI has been absent in the onshore forex market of late both in the spot and forward markets.

Jayesh Mehta, MD and head of treasury at Bank of America-Merrill Lynch, says investors are buying long-term bonds because they believe interest rates will come down since the RBIs retail inflation target of 6% by January 2016 seems achievable.

Moreover, the India growth story would keep the currency stable.

With hedging costs at around 6%, foreign investors can hope to pocket a return of at least 2.5-3.0% through corporate bond investments given the yield is a minimum 9% for a tenure of above five years. Having pumped in a record $22 billion into the Indian bond market between January and October 27, foreign funds have now used up 67.5% of the total available investment quota of $81 billion. Mehta believes total investment in the current year could cross $25 billion. Data from depositories show that 99% of the $25-billion investment limit in government bonds has been exhausted while foreign investors have used up half of the $51-billion limit in corporate bonds.