The Reserve Bank of India (RBI) has tinkered with the limit on foreign investors' holding of government bonds to help portfolio investors buy an additional $5 billion worth of securities, but imposed a caveat that the bonds should have a minimum maturity of three years.
The central bank's decision comes after a rush of investments post elections used up the limit of $20 billion. With this, portfolio investors could buy $25 billion worth of sovereign bonds though the $30 billion overall limit for foreigners remains. With this move, sovereign and longterm funds which had a limit of $10 billion will see that halving.
The minimum maturity clause is likely to aid trading volumes in other government securities, but there should be no sell-off since RBI has said that there is no lockin for the bonds purchased.
International investors on Monday forked out double the rate of commissions to buy limits for investing in government securities as they expected a higher limit and a possible fall in interest rates over the next two years when their value of bond holdings will appreciate. Bond yields and prices move in opposite direction.
"Amid prevailing uncertainty across the globe, India appears the safest bet among emerging economies," said Ajay Manglunia, senior vice-president, Edelweiss Financial Services.
"Overseas investors are bullish with a higher appetite for debt securities before interest rates actually start falling. Willingness to pay higher charges to acquire FII ( foreign institutional investors) quota is a reflection of that."
The threshold level, below which bids were not allowed, for the auction was Rs 0.1500 while it was justRs 0.0725 on July 1. For an amount ofRs 1,000 crore, therefore, an overseas investor had to pay a commission of Rs 1.50 crore to the securities market regulator Sebi which auctions the permit, compared withRs 72.50 lakh earlier. The cut-off level was still lower at Rs 0.0480 in the auction on June 11.
The country sells the residual investment limits in government debt after foreign investors exhaust 90% of the overall limit. Before the latest auction, close to 97% of the limit in government bonds of the $20 billion cap was used. The latest auction limits have to be utilised by August 5.
Despite geopolitical turbulence, Indian markets appear attractive with yields of more than 8.5%, compared with yields of less than 2.5% on the US treasuries, or slightly higher for other developed market. "Two domestic factors primarily triggered some additional exuberance among overseas investors," said Harihar Krishnamoorthy, head treasurer, FirstRand Bank. "While markets were expecting some enhancement for overseas debt investment by reallocation within existing sub-limits, the upcoming new 10-year benchmark security is also creating investment appetite for them."
The ten-year year benchmark government bond yield trended down from 8.71 % to 8.66% subsequently between Monday and Wednesday. Since the beginning of July, FIIs have net boughtRs 12,869 crore of Indian debt securities while they have net investedRs 6,464 crore in equities. In April, at the beginning of the financial year, they had net soldRs 10,768 crore in debt and net bought Rs 5,283 crore in equities.
