Foreign institutional investors have been piling up limits in debt investments at the monthly auctions, but these limits have not translated into actual investments.
FIIs have 45 days to invest once they acquire limits in government bonds and 90 days in corporate bonds.
Foreign investors bought limits worth $3.2 billion on September 20. Even after 90 days, the incremental investment by FIIs in debt was around $1.7 billion. Therefore, a part of the limits acquired has been allowed to lapse. Further, even as FIIs had bought fresh limits worth $3.5 billion through the auction on October 20, they held unused limits worth $4 billion at that time.
In the January 21 auction, FIIs bought limits worth around $3.3 billion even as they held unused limits worth $2.8 billion. Since the auction, FIIs have net purchased just $770 million worth of Indian debt. During the same period, FIIs have invested close to $4.4 billion in shares.
“FIIs are more comfortable with equities because there are no restrictions there. Moreover, arbitrage opportunities in debt may have reduced,” said Manoj Rane, head of fixed income and treasury at BNP Paribas.
Bankers said the overall cost for an FII to invest in Indian debt comes to around 7-8% on a fully hedged basis. A bond yield lower than that may not attract investment.
Bond yields have eased over 15 basis points since January, making them less attractive to invest. Sebi will auction limits worth $12 billion on February 20. The auction will also offer the enhanced limit of $10 billion in government and corporate bond. Bankers expect strong response from FIIs as investors would rather pay premium for a limit than lose a good opportunity to buy bonds.
“At the end of the day, the premium cost does not make much of a difference and you have a 45-day window to invest,” said a dealer at a foreign bank.