Foreign institutional investors paid an unprecendented 68.3 basis points of premium to get hold of a slice of investment limit in government bonds on Monday.
The National Stock Exchange (NSE) auctioned investment limits worth R3,041 crore (around $500 million) in government debt to FIIs on Monday. The highest premium offered was 75 bps at the auction where 73 FIIs participated.
Government bond yields have fallen more than 40 bps in the last two months, which has made the scramble for acquiring them more intense at the auctions. Monday’s auction attracted bidding worth R7,224 crore (around $1.15 billion), more than double the amount up for grabs. FIIs have poured in a record $24.5 billion into Indian bonds so far in 2014, the highest ever seen since liberalisation. The bulk of the inflow has been in government bonds and, thus, investment limits hit the $25-billion cap in August. The Securities and Exchange Board of India has mandated that once 90% of investment limits are used, the rest would be auctioned.
In the previous auction, too, on November 10, the bidding from FIIs was aggressive enough. The cutoff price at that auction had been high at 53.50 bps. “Interest rates are expected to ease over the next six months, so FIIs want to get hold of risk-free government bonds,” said a bond trader at a foreign bank. Yields on the 10-year benchmark bond dropped to 8.06% on Monday from 8.48% in October as traders priced in policy rate cuts owing to a steady fall in retail inflation. Government bonds range in 8.05-9.50% band across tenures with the 10-year benchmark security at 8.06%. FIIs have been investing in corporate bonds too with the limit in government bonds near the cap of $25 billion. Investors have exhausted 57% of the $51 billion investment limit in corporate bonds.