Strong demand from FIIs for govt debt quotas

The strong interest comes even after Standard & Poors on Friday maintained its negative outlook on Indias sovereign ratings,which analysts say should not have a long-term impact on markets

Bonds have surged to 3-1/2 year highs as sharply easing inflation spurs hopes that the Reserve Bank of India will continue to cut interest rates as early as its next policy review in June.

Several factors might have contributed to strong bidding interest in todays FII debt limit auction: positive surprise on inflation,expectations of further rate cuts,and recent reduction in withholding tax to 5 percent, said Nagaraj Kulkarni,a senior rates strategist for South Asia at Standard Chartered Bank in Singapore.

The May auction is the first since India cut the withholding tax applied on interest income for foreign investors late last month,hoping to attract more funding to bridge its current account deficit and polish its reformist credentials.

The government also had relaxed ownership limits in Indian debt for overseas investors in early April.

After these measures,foreign investors have bought a net $1.63 billion worth of government bonds in May,more than $992.2 million for the whole of April,regulatory data shows.

The strong demand for debt quotas on Monday was also because the amount being auctioned was a fraction of the Rs 291.08 billion sold in April.

That was reflected in a surge in the cut-offs,meaning foreign investors were willing to pay much higher rates for the debt limits.

Almost all of the $25 billion limit for foreigners in government debt has been exhausted,while just under half of the corporate debt limit of $51 billion has been used,as per capital market regulator data until end of April.

India no longer auctions debt quotas for corporate bonds and sells them instead on a rolling basis. Benchmark 10-year bonds have rallied this month,sending yields to as low as 7.32 per cent on Friday,their lowest since December 2009.

Lower inflation data have spurred hopes the RBI could cut interest rates again after easing by a combined 75 basis points via three separate rate cuts this year.

These hopes are offsetting the potential risk of a downgrade in India,which has been under negative outlooks from S&P and Fitch Ratings since the middle of last year.

R101.46 billion worth of orders

n India attracted Rs 101.46 billion worth of orders for quotas to buy government debt from foreign institutional investors (FIIs),far more than the Rs 55.33 billion on offer

n Bonds have surged to 3-1/2 year highs as sharply easing inflation spurs hopes that the Reserve Bank of India will continue to cut interest rates as early as its next policy review in June

n The May auction is the first since India cut the withholding tax applied on interest income for foreign investors late last month

n The government also had relaxed ownership limits in Indian debt for overseas investors in early April