Drab FII demand for govt bonds

The total market demand was Rs 39,171 crore today compared with a demand of Rs 10,146 crore last time

In the Foreign Institutional Investors (FII) auction held today for government bonds, the total market demand was lesser than the amount available for auction. According to information given by debt market sources, the amount available for auction was Rs 42,022 crore, which was much higher than Rs 5,533 crore available for auction last month. The total market demand was Rs 39,171 crore today, compared to the demand of Rs 10,146 crore last time.

In today’s auction the number of bidders were only 37, compared with 68 last month. In today’s auction, the highest bid was 0.50 basis points compared with 14.00 basis points earlier. The cut-off came at 0.0001 basis points, compared with 10.25 basis points last month. FIIs have been pulling out of Indian debt due to expectations that the US Fed would start pulling back its bond-buying programme, knows as Quantitative Easing 3 (QE3). In his speech yesterday, Federal Open Market Committee (FOMC) chairman Ben Bernanke’s confirmed with the Street fears that the US Fed would begin to reduce its stimulus later this year, as the economy improved. In such a scenario US treasuries have been becoming more attractive for FIIs.

According to traders, the FIIs got the bonds at a cheaper rate, but in a scenario where there are hints the US Fed may start pulling back QE3, the total market demand of Rs 39,171 crore may not get fully subscribed. “These FIIs have 30 days for taking these bonds. So, they have enough time to decide if they want to buy these bonds. In a scenario when the rupee is weakening and FIIs are pulling out of domestic debt, I do not think the entire amount of bonds will be bought by them,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

However, there are few who believe receiving bids for Rs 39,171 crore is also quite encouraging. “This is very positive for the debt market. This amount of Rs 39,171 crore is about $ 6 billion. If this money comes into India, it will be very positive for the rupee against the dollar,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank.

According to Securities and Exchange Board of India data, FIIs pulled out over $3 billion from domestic debt so far this month.

Yesterday, US treasuries surged the most since 2011 after Bernanke said the Fed may moderate its $85 billion bonds per month purchases later this year if growth is consistent with its forecasts.

In India, the yield on the 10-year benchmark bond 7.16 per cent 2023 rose 13 basis points to end at 7.39 per cent compared with previous close of 7.26 per cent. Government bonds slumped today as the rupee touched an all-time low in intra-trades at 59.98 per dollar raising fears about continued FII selling at a time when emerging markets are under pressure after the US Fed signalled an end to QE3.

The Reserve Bank of India did intervene in the forex market to arrest volatility, but despite that the rupee ended at 59.58 compared with the previous close of 58.72.