Despite fears of India being downgraded by rating agencies, foreign institutional investors appeared willing to buy Indian paper, picking up fresh limits at Tuesday?s auction of gilts and corporate bonds.
However, they paid relatively lower premiums than they have in previous auctions. The cut-off premium for government bonds was 2 basis points while for corporate bonds it was 2.8 basis points. The highest premium paid by an FII was 4 basis points. At the last auction, gilts had commanded a premium of 5-7 basis points.
According to data from the Securities and Exchange Board of India (Sebi), quotas acquired at the last auction on July 20 remain unexhausted.
Not surprisingly, FIIs preferred to pick up limits for shorter-term government and corporate bonds that have no tenure restrictions, and stayed pretty much away from long-term gilts and infrastructure bonds.
Sebi auctioned $1.62 billion (R8,990 crore) worth of limits for gilts with at least a five-year residual maturity and $1.61 billion (R8,921 crore) of limits for infrastructure bonds.
Sebi received bids worth over $500 million (R3,218 crore) for gilts in the unrestricted tenure category against the auction size of $400 million (R2,275 crore), dealers who participated in the auction process said.
The regulator got bids worth over over $1 billion (R6,322 crore) for corporate bonds as against limits worth $830 million (R4,591 crore) that it put up for auction.
?Demand for the unrestricted category is always decent for the precise reason that there are no riders to these bonds,? said the head of treasury at a foreign bank.
FIIs investing in infrastructure bonds must buy paper with a minimum tenure of one year and lock their investments for up to 15 months. Bids for long-term gilts totalled $845 million (Rs 6,322 crore) and that for infra bonds were around $380 million (Rs 2,132 crore),way short of the amount auctioned. The limits for infra and long-term gilts were allocated at zero premiums.
Norms stipulate that FIIs must utilise their investment limits within 45 days in the case of government bonds and 90 days in the case of corporate and infrastructure bonds from the date of allocation of these limits.
As on July 31, FIIs held $290 million worth of limits in government bonds and $1.97 billion in corporate bonds which they have not used by buying bonds.
During August, FII investment in the debt market has been muted, as provisional data from Sebi shows. FIIs bought only around $10 million worth of debt in August.