Amid reports of the government planning to double the ceiling on foreign investment in government securities to $20 billion, foreign institutional investors (FIIs) have stocked up on allocations to buy infrastructure bonds. An auction of infrastructure bonds for $5 billion (R24,500 crore) held earlier this month was oversubscribed by a fairly large amount.
Though FIIs have bought bonds worth only $4.3 billion in calendar 2011, inflows could rise sharply in the next couple of months as they pick up the bonds they have bid for.
?Most of the bids were for paper at the shorter end of the curve and as a result, yields have come down by about 25 basis points. So, for a five-year paper with an 18-month put-call option, yields fell to around 9.10% levels, though they have risen again,? said Jayesh Mehta, head of treasury, Bank of America.
FIIs have three months within which they have to buy the bonds, most of which fall in the highest-rated AAA category. The $25-billion limit for infrastructure bonds had not been utilised till the recent auction because the government had earlier stipulated that the bonds needed to have a residual maturity of five years. However, that rule was recently relaxed with FIIs allowed to buy bonds with a residual maturity of three years or one year.
While the Indian corporate bond market remains fairly illiquid, yields have gone up sharply over the past six months, making the paper attractive, especially since most of the borrowers belong to the public sector.
Despite strong FII interest in infrastructure bonds, yields are expected to stay high because interest rates are unlikely to come off meaningfully at a time when government borrowings are high.
?It?s difficult to see yields on corporate bonds trending down soon, given that yields on government securities are nudging 9%,? said Hitendra Dave, MD and head of global markets at HSBC. Dave believes that an increase in FII limit for gilts will definitely help ease the pressure on yields and the market desperately needs a new set of buyers to take the pressure off banks. ?Yields may not fall too much but they may not go up,? Mehta added.
Currently, banks are overloaded with gilts and the statutory liquidity ratio (SLR) for the banking system as a whole is closer to 30% rather than the mandated 24% of net demand and time liabilities.
The yield on the 10-year benchmark has risen about 50 basis points since September 29 when the government announced it would be borrowing an additional R53,000 crore in the current year taking the total net borrowing to just under R 4 lakh crore. Last week, an auction of gilts for R13,000 crore devolved to the tune of R4,000 crore.