Data show FIIs bought $573-m bonds in Dec, invested $2.8 bn since April
Foreign institutional investors (FIIs) are aggressively using their debt limits that they bought at high premium in the last two auctions and buying government and corporate bonds, as hopes of policy rate cuts have started building up.
Government bond yields have fallen 10-15 basis points across tenures with the benchmark 10-year bond yields hitting a two-year low in just a week. On Tuesday, the bond ended at 7.90%. Yields on top-rated corporate bonds have also slipped by nearly 20 bps during the same period.
Between December 31 and January 7, when bond yields fell 10 bps, FIIs had invested $482 million (R2,665 crore) in debt. Hopes that the Reserve Bank of India will cut policy rates by at least 25 basis points in January and further in the subsequent quarters have inspired investors, both FII and domestic, to buy bonds.
?Towards the RBI policy, rate cut expectations have started to build up. The market feels economic indicators like core inflation would come down,? said Hitendra Dave, head of global markets India at HSBC Bank.
Dave added though the rally in bonds was not driven by FIIs, foreign funds too have been on the buying side.
Provisional data from Sebi show FIIs bought $573 million worth of bonds in December. Since April, they have invested $2.8 billion.
FIIs had bought debt limits worth $3 billion (R16,550 crore) at the auction on December 20, even as they held close to R3,000 crore worth of unused limits. Of the total debt limit bought, R12,249 crore was in government bonds and the rest in corporate paper. Premium paid was double than that paid in November auction. For corporate paper, FIIs paid premium of over 12 bps and for sovereign bonds, they paid around 9 bps.
The Securities and Exchange Board of India auctions debt limits on 20th of every month and auctions are held if the free limit available exceeds R1,000 crore.
FIIs have to use these limits in 90 days in case of corporate debt and long-term infrastructure debt and 45 days for government bonds. Dealers said the debt limit auction in January will see strong bidding interest from FIIs given outlook on yields and interest rates. The past two debt limit auctions were aggresively bid by FIIs and fully subscribed.
?Since it is the beginning of a falling interest rate cycle, FIIs will continue to buy bonds,? said a dealer with a foreign bank.
