Foreign fund inflows into the Indian debt market were at a five-month high of $1 billion in October, with investors expressing confidence in the governments fiscal consolidation road map, a relatively stable rupee and hopes of interest rate cuts ahead. Foreign institutional investors (FIIs) bought bonds worth $1.33 billion in October after nibbling at Indian paper for five months before that.
The average monthly FII investment in debt between June and August was $150-200 million, Sebi data show.
Over the last two to three months, we have seen increased interest from high-quality investors such as sovereign wealth funds and even central banks who are buying Indian bonds, especially government bonds, said Hitendra Dave, head of global markets, India, HSBC Bank.
The bulk of the buying about $500-600 million was accounted for by gilts, treasurers said. While the rest of the money went into corporate bonds, the sharp rally in short-term paper, which caused yields to come off by 10-15 basis points, prompted some profit taking.
At the monthly auction of investment limits on October 22, FIIs bid aggressively both for government and corporate bonds that did not have tenure restrictions, coughing up high premiums. Compared with the auction in August, when the premiums were 3 basis points, this time around they were 8 basis points.
At the July auction, premiums were 6 basis points. Some positioning ahead of the RBI policy could have been the reason for the purchases, Ashish Parthasarthy, head of treasury at HDFC Bank, said.
Moreover, treasurers said that FIIs needed to use up quotas acquired at the auction on September due by November 1, else they would have lapsed. There were some quotas due to expire and so FIIs may have bought bonds through these, said Manoj Rane, MD and head of fixed income at BNP Paribas.
FIIs are hoping to earn yields of roughly 8% on gilts and slightly more on corporate bonds, if they do not hedge their purchases. Assuming they do, the yields would drop to a little over 4%. However, the bigger play is on capital appreciation since interest rates are expected to head south. In fact, FII purchases amounted to just $150 million in the first two weeks of October. However, the buying picked up substantially thereafter in the run-up to the Reserve Bank of India's monetary policy announcement,with FIIs buying around $1 billion worth of bonds, provisional data from Sebi show. The buying was also