After eight months,FIIs turn buyers of bonds,invest $1 bn

The RBI announced two concessional swap windows for banks through which it garnered $34 billion. These swap windows encouraged banks to push foreign currency non-resident deposit products and bring in dollars. “December was a better month in terms of data,which could have enthused investors to buy,” said a bond trader at a foreign bank.

These investments have,however,been concentrated only in a few bonds,dealers said. FIIs have been buying only highly liquid bonds such as the 7.28%,2019 bond and the 10-year benchmark paper besides short-term treasury bills,dealers said. Data from depositories showed that FII holdings of treasury bills rose by R3,300 crore while their holdings of long-term bonds rose by R3,100 crore.

Dealers also said that since the US Federal Reserve has announced that it would reduce its monthly bond purchases by $10 billion from January,the uncertainty surrounding the taper has diminished. This uncertainty and the fear that the Fed’s taper could hurt emerging markets economies and more so India given the country’s weakening external sector had FIIs exiting bonds in a big way. Foreign investors sold a massive $12 billion of bonds between May and November.

This selling snowballed further as the rupee began to depreciate sharply and bond yields rose,feeding into the selling. The currency hit an all-time low of 68.85/$ on August 22 while bond yields had surged nearly 100 basis points by then. Bond yields have eased since then and the rupee has recovered 11% from its all-time lows and ended at 61.80/$ on Tuesday. The most liquid 10-year benchmark bond yield has eased to 8.82% from as high as 9.24% in August.

“The biggest uncertainty now is the political one,which we have to watch for,” said Ananth Narayan G,head of global markets at Standard Chartered Bank. The uncertainty on the political front due to general elections that are due in 2014 may keep investors jittery and could prevent big dollar inflows,dealers said.