Foreign institutional investors (FII) have poured a record $6.19 billion into Indian bonds so far in 2015 and were willing to pay sky-high premiums to get a tiny investment slice in government bonds, the limit in which has long exhausted.
The auction of the freed investment limit in government bonds to FIIs on Monday saw a frenzy for a small chunk of $150 million and FIIs paid 112 basis points of premium to get hold of an investment slice. The Securities and Exchange Board of India (Sebi) has mandated that once 90% of investment limits are used, the rest would be auctioned. The investment limit in government bonds was exhausted in August 2014 and, ever since, small portions of the limit were freed due to redemptions or sale to domestic investors, the freed portion were being auctioned.
The National Stock Exchange auctioned investment limits worth Rrs 893 crore (around $150 million) in government debt to FIIs on Monday.
The highest premium offered was 112 bps at the auction where 53 FIIs participated.
Government bond yields have remained soft in the last one month after falling more than 20 basis points during January-February. Monday’s auction attracted bidding worth Rs 2,352 crore (around $375 million), more than twice the amount up for grabs.
With the government bond investment limit exhausted and small amounts freed as and when due to redemptions or sale by FIIs, foreign investors have been picking up corporate bonds since September. Yields on corporate bonds had also eased, making such investments more appealing to foreign investors.
Data from the depositories show that foreign investors invested the entire $6.19 billion into corporate bonds. In fact, an additional $200-million limit freed from redemption of earlier holdings of commercial paper was reinvested in long-term corporate bonds. The RBI had banned incremental investment by FIIs into commercial papers from February onwards.