Foreign institutional investors (FIIs) seem to find Indian bonds less attractive these days having turned net sellers in the past couple of weeks. That’s despite yields being near multi-month highs and the rupee remaining stable, reports fe Bureau in Mumbai.
FIIs have pulled out $1.06 billion from the local debt market so far in April even as the 10-year bond yield hit a four-month high, crossing 9% on April 7. Some of the outflows were anticipated; of the $1.06 billion that moved out, $450 million was due to treasury bills maturing.
The Reserve Bank of India has disallowed FIIs from investing in short-term treasury bills from April onwards. FIIs had pumped in $6.1 billion during January-March, most of it into treasury bills. However, FIIs have also turned a tad cautious because forward premiums have risen and the poll results are around the corner.
“Investors who had bought treasury bills earlier on a fully hedged basis, have now started selling because the forward premiums have moved up. But we are seeing inflows of long-term money into bonds like those from sovereign wealth funds,” Ananth Narayan G, head of global markets at Standard Chartered Bank, pointed out.
Typically, an FII borrows a dollar loan overseas to buy rupee bonds from the domestic market.
The currency risk is hedged in the offshore NDF market where the three-month premium for dollar/rupee is currently at 8.0-8.10%, up from 7.0-7.5% in March. “Much of the flows had come in anticipating the election outcome and now since we are close to the election results, people are in a wait-and-watch mode,” a senior bond trader at an Asian Bank said.
Even as FIIs have been selling, long-term investors such as sovereign wealth funds, pension funds and insurance companies have steadily increased their bond purchases.
Long-term investors have bought bonds worth close to $240 million so far in April. Data from the depositories show that these long-term investors have used up nearly 20% of their quota of $10 billion in government bonds as of April 21. Between February and now, long-term investors have bought bonds worth Rs 4,000 crore ($660 million). The investment limit for such investors in government bonds is $10 billion, over and above the $20 billion for FIIs.