FIIs pull out $1.06 bn from bonds

Written by fe Bureau | Mumbai | Updated: Apr 23 2014, 10:49am hrs
Foreign institutional investors (FIIs) seem to find Indian bonds less attractive these days having turned net sellers in the past couple of weeks. Thats despite yields being near multi-month highs and the rupee remaining stable, reports fe Bureau in Mumbai.

FIIs have pulled out $1.06 billion from the local debt market so far in April even as the 10-year bond yield hit a four-month high, crossing 9% on April 7. Some of the outflows were anticipated; of the $1.06 billion that moved out, $450 million was due to treasury bills maturing.

The Reserve Bank of India has disallowed FIIs from investing in short-term treasury bills from April onwards. FIIs had pumped in $6.1 billion during January-March, most of it into treasury bills. However, FIIs have also turned a tad cautious because forward premiums have risen and the poll results are around the corner.

Investors who had bought treasury bills earlier on a fully hedged basis, have now started selling because the forward premiums have moved up. But we are seeing inflows of long-term money into bonds like those from sovereign wealth funds, Ananth Narayan G, head of global markets at Standard Chartered Bank, pointed out.

Typically, an FII borrows a dollar loan overseas to buy rupee bonds from the domestic market.

The currency risk is hedged in the offshore NDF market where the three-month premium for dollar/rupee is currently at 8.0-8.10%, up from 7.0-7.5% in March. Much of the flows had come in anticipating the election outcome and now since we are close to the election results, people are in a wait-and-watch mode, a senior bond trader at an Asian Bank said.

Even as FIIs have been selling, long-term investors such as sovereign wealth funds, pension funds and insurance companies have steadily increased their bond purchases.

Long-term investors have bought bonds worth close to $240 million so far in April. Data from the depositories show that these long-term investors have used up nearly 20% of their quota of $10 billion in government bonds as of April 21. Between February and now, long-term investors have bought bonds worth Rs 4,000 crore ($660 million). The investment limit for such investors in government bonds is $10 billion, over and above the $20 billion for FIIs.