Foreign institutional investors bought $1.46 billion worth of bonds on Monday, the biggest single-session purchase since August 2014, data from the Securities and Exchange Board of India showed.
According to bond traders, bulk of this inflow was into a rupee bond issue floated by Vodafone wherein the telecom major borrowed Rs 7,500 crore (nearly $1 billion) from the domestic market through five-year bonds.
The bonds were priced at 10.25%, far higher than the yield in the secondary market, which was between 9% and 9.1% for a AAA-rated private company.
Dealers said the yield was higher given the huge size of the rupee bond issue. Further, FIIs demanded a premium due to the costs involved in hedging currency and credit risk while buying the bonds.
“The inflow is largely into the Vodafone bond sale. Otherwise, there is no reversal in the trend of FIIs selling bonds as yet,” said a bond dealer at a foreign bank.
FIIs have been net sellers of bonds in almost all trading sessions in May and June, baring the Vodafone inflow.
FIIs have pulled out $618 million from the bond market so far in June after having already sold $1.3 billion in May. This breaks their buying streak of more than 12 months now.
The bond selling by FIIs had begun in May amid a global selloff across emerging markets as rise in yields and increasing oil prices had stoked worries of an earlier-than-expected interest rate cut by the US Federal Reserve.
Yield on US treasury notes have risen by 25 basis points since May, while German bunds have risen 40 bps. Yield on domestic bonds has climbed 20 bps. This had also reduced the differential between US bond and Indian bond yields, a key parameter that FIIs see while gauging the returns on bond investment.
The RBI’s move to hike its forecast for retail inflation to 6% for March 2016 from 5.8% earlier has added momentum to this selling by FIIs even though the central bank cut its repo rate by 25 bps to 7.25%.
Bond traders said the forecast was bearish and, coupled with predictions of a weak monsoon, most investors wanted to exit bonds. However, given that foreign investors still paid high premiums for getting a slice of investment limit in government bonds at the auctions, they remain net investors. Data from the depositories show that FIIs have used up 85.93% of the $81-billion investment limit in Indian bonds as of Wednesday.