FIIs lead bidding for debt limits in Sebi auction of government bonds

At the previous auction in June,FIIs had lapped up 93 per cent of the around $7 billion worth of investment limits auctioned

Written by ENS Economic Bureau | Mumbai | Published: July 23, 2013 3:10 am

Even though foreign institutional investors (FIIs) have been net sellers of Indian bonds since late May,they continue to bid aggressively for investment limits in government bonds auctioned by Sebi.

At the monthly auction conducted by Sebi on Monday,bids from FIIs totalled nearly $4.50 billion at the auction where debt limits worth $4 billion were on offer. Interestingly,premiums paid to buy the limits rose to 0.05 bps,suggesting that interest may have revived marginally after last month’s global sell-off in bond markets.

At the previous auction in June,FIIs had lapped up 93 per cent of the around $7 billion worth of investment limits auctioned,but at dirt-cheap premium levels of 0.001 bps.

“It is literally a free auction. FIIs don’t mind paying a small price to get the rights to buy debt,” said Hitendra Dave,head of global markets,HSBC India. Dave added that not all limits acquired will turn into actual investment. For instance,after buying limits worth $6.5 billion at investment limit auction in June,FIIs have,in fact,net sold $3.4 billion worth of bonds thereafter.

Indeed,as on July 18,FIIs held unused debt investment limits worth nearly $6 billion. Foreign investors have used only 53 per cent of the total $25 billion worth of limit available in government bonds. An FII has a 45-day window to invest in the government bond market after allocation of limits.

“It is an option to invest. But it is not necessary to invest,” said Jayesh Mehta,MD and head of treasury,Bank of America-Merrill Lynch.

Bankers also said FIIs prefer acquiring investment limits even when the intention is not to invest in the bond market as such limits come cheap.

Ironically,FIIs had been willing to pay premiums as high as 15 bps to acquire limits at the auction on May 20. However,with the US Federal Reserve indicating a withdrawal in quantitative easing,FIIs started pulling out of Indian bond market from May 22 onwards.

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