FOREIGN portfolio investors (FPI) offered to pay a premium as high as 85 bps to get hold of limits in Indian government bonds as they offer one of the highest returns among emerging market sovereign bonds and an exposure to an economy whose growth is recovering fast and inflation is softening.
The auction on Monday, wherein investment limits worth Rs 5,600 crore were up for grabs, saw an unprecedented participation of 88 bidders, totaling Rs 17,216 crore. The cut-off premium was set at 66 bps, higher than the 53.01-bps set at the previous auction.
That FPIs were willing to pay exorbitantly to get the right to buy sovereign bonds is evident from the outcomes of every successive auction since August 2014 when the limits were exhausted. FPIs have bid aggressively at every auction on hopes that bonds would fetch a handsome gain as the country readies for a lower interest rate regime. The
RBI has already slashed interest rates four times, with the latest cut being a deeper 50 bps last month, citing an easing inflation.
Indeed, notwithstanding that the amount of investment limits on offer were far larger than that in previous auctions owing to the recent hike in investment limits for FPIs by the RBI, there was no dearth of bids. “There was a sort of rush to lap up the R5,600 crore worth of G-Sec limits that were put on auction on Monday. The number of bidders touched 88 against the 35 seen during the last auction on September 21. This trend shows the increasing appetite of FII in gilts,” said Ajay Manglunia, executive vice-president of fixed income at Edelweiss Securities.
In 2015 so far, FPIs have poured $6.4 billion into bonds, more than the $3.82 billion invested in shares. With the Monday’s auction being fully subscribed, the total investment limit in government bonds is again exhausted.
According to bankers, even as the Reserve Bank of India continues to open up more room to invest in tranches, the limits will get exhausted.
At its bimonthly policy in September, the RBI said FPIs will be gradually allowed to increase their investments in government bonds up to 5% of the outstanding stock by March 2018. In the first tranche, the central bank has allowed additional Rs 5,500 crore to foreign investors. Further, long-term investors, such as pension funds, foreign central banks and insurance companies, can buy R7,500 crore worth of bonds over and above the existing limit. FPIs can also invest Rs 3,500 crore into state development loans. These would be available on tap.