Foreign institutional investors (FII) are likely to buy government bonds to be auctioned on Wednesday, even though these will have a residual maturity of three years. However, they will possibly pay a smaller premium to acquire investment limits. ?So far, the limits on gilts have been filled and utilised; so there should not be any problem this time too,? said Ashish Parthasarthy, head of treasury at HDFC Bank, adding that premiums may be somewhat lower this time around. He feels premiums may not rise to levels as high as those seen in the December auction.
At the recent June auction, the premium forked out by buyers was 6 basis points. The bonds, however, did not attract any maturity restrictions and the amount auctioned was R1,464 crore. ?The supply this time around is much bigger,? points out a treasurer with a leading bank.
The demand for infrastructure bonds is likely to be muted because although the residual maturity has been reduced to 15 months, FIIs prefer papers of even shorter maturities. ?FIIs prefer short-term paper since they can hedge the exposure and exit easily,? said a dealer.
The Securities and Exchange Board of India (SEBI) will auction limits for $5 billion (Rs 28,496 crore) of government bonds and $7 billion (Rs 31,387 crore) of infrastructure bonds on Wednesday. On June 25, the government hiked FII investment limit in government bonds by $5 billion to $20 billion, adding the additional limit must be invested in bonds with minimum three-year maturity. In the recent June auction, the cut-off for corporate bonds was 24 basis points while for the infrastructure bonds ? Rs 7,800 crore worth of which were auctioned ? the cut off was virtually zero.
In November 2011, FIIs had paid hefty premiums of around 120-135 basis points to buy gilts worth around Rs 25,000 crore. The government had upped the investment limit for gilts by $5 billion to $15 billion, and the bonds did not have tenure restrictions. Most important, the outlook on India at the time was more bullish and investors were anticipating a reversal in the interest rate cycle. However, in the auction of limits in March where tenure restrictions were imposed, premiums paid ranged from 1.5 bps to 2.20 bps for an amount of Rs 2,220 crore.
Premiums paid by FIIs have eased further ever since. In the latest auction on June 20, with a tenure restriction of three years, FIIs paid a premium of just 0.01-0.10 bps to get limits worth Rs 1464 crore.
Sebi auctions unused debt investment limits to FIIs on the 20th of every month. However, with the limits being enhanced, the capital market regulator will allot these through a special auction, Sebi said in a notice on Tuesday.
Around Rs 3,800 crore worth of government bonds with a residual maturity of over five years were auctioned, but the auction garnered bids worth only Rs 2,437 crore.