The over $10 billion (almost Rs 60,000 crore) debt auction of government securities (G-secs) and corporate debt on Wednesday saw muted response from overseas investors as about a third of permits on offer went unsold.
The auction to buy nearly Rs 28,500 crore worth of government bond limits received bids for just Rs 20,496 crore. Meanwhile, only Rs 19,777 crore out of Rs 31,387 worth of corporate bond limits were sold.
FIIs need to buy debt limits through Securities and Exchange Board of India (Sebi) auctions held on the 20th of every month. The limits acquired through auctions have to be utilised within 45 days (60 days for corporate debt.)
Sebi on Wednesday conducted a special two-hour auction to sell enhanced G-sec limits.
Global investors paid wafer-thin premiums to buy these limits. The highest bid to buy a G-sec permit was just 0.01 basis points, which means FIIs paid a premium of Rs 0.01 to buy bonds worth Rs 100. The maximum bid to buy corporate debt was just 0.005 bps.
The near-zero premiums to buy the debt permits even raised concerns among experts whether foreign investors will use these limits.
“The response was lower than expected. FIIs may not be interested in investing for longer tenures because of weak economic outlook and depreciating currency,” said Vivek Mhatre, general manager at Union Bank of India
The poor response at on Wednesday's auction was attributed to the new re-investment rules, tenor restrictions and high cost of currency hedging.
The auction was in stark contrast to the one conducted in December last year, when FIIs had lapped up the entire limits on offer through aggressive bidding. Back then, limits acquired were available for perpetuity.
However, in January, in a major policy change, Sebi said the limits bought won’t be re-investable and can be bought only once. Since then, the premiums paid by FIIs to buy debt permits have come down drastically.
Industry players said there was not much buying interest from the new set of foreign institutional investors (FIIs) at on Wednesday’s auction.
“Mostly only existing FIIs participated in the auction. Most of them already hold enough buying limits,” said a bond dealer at a leading foreign bank, who didn't wish to be quoted. “New FIIs may be were wary of investing in a country which is on the verge of a rating downgrade,” he added.
The G-secs sold on Wednesday have a minimum residual maturity of three years, while the long-term corporate bond infrastructure limits auctioned have a one year lock-in period and residual maturity of 15 months. Last month, FII debt limits in G-secs were increased by $5 billion to $20 billion by the government to support the weakening rupee by attracting fresh fund flows.
The lukewarm response to the auction casts a doubt on the attractiveness of the Indian debt market in the eyes of foreign investors, despite the high yields on offer.
The Indian benchmark 10-year bond yield on Wednesday closed at 8.16 per cent, while the yield on a triple A-rated corporate paper was at 9.36 per cent. The yield on the 10-year benchmark Indian government paper is much higher than that in even troubled nations like Italy and Spain. The 10-year paper in Italy and Spain yields 5.72 per cent and 6.32 per cent, respectively.
"Even though yields here are attractive, factors like risk aversion and weaker growth outlook are holding foreign investors back,” said Ajay Manglunia, senior vice president, Edelweiss Securities. “Muted FII demand indicates that they prefer to wait than to bid aggressively,” he added.