Foreign investors are unlikely to cough up higher premiums at the Rs 60,000-crore debt auction to be held on Wednesday.
Unlike in December 2011, when they had bid aggressively to acquire debt investment limits by paying a hefty premium, this time around foreign institutional investors (FIIs) are expected to pay only modest amounts to buy the new limits, say market players.
After market regulator Securities and Exchange Board of India (Sebi) introduced the ‘sunset clause’, FIIs have become wary of paying more than the intrinsic value of the bonds.
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Under this clause, introduced in January, the re-investment period for all new allocations of debt limits was removed. Earlier, as the limits bought were for perpetuity, FIIs were ready to pay premium to buy these limits. In the Rs 60,000-crore auction held in December, FIIs had paid 115 basis points premium on government securities (G-Secs) and about 67 basis points on corporate bonds.
As the new limits won’t be re-investible, premium are likely to drop to as low as one basis point, say market players. Experts also say as the FII debt auction takes place every month, the scarcity premium that FIIs used to pay will also diminish.
“Given the tenor restrictions and existing re-investment rules, combined with high-hedging costs, we expect only modest demand from foreign investors. We think it is likely that cut-off yields for both these categories could be less than one basis point,” wrote Kumar Rachapudi, fixed income strategist at Barclays Capital, in a research note. However, very few are doubting Wednesday’s auction, the biggest since December, to go unsold.
N S Venkatesh, head of treasury at IDBI Bank, said, “FIIs will bid at a lower premium after pricing in recent regulatory changes. But the auction will be fully subscribed, given the attractive yields compared to other markets.”
“The response to recent auctions may not have been very encouraging. But given certain relaxations in the lock-in period and allowing new classes of investors could result in good interest in the forthcoming auction,” said Ajay Manglunia, head (fixed income markets), Edelweiss Financial Services.
Through a special two-hour window, Sebi will auction limits of $5 billion of G-secs and another $5.6 billion of corporate long-term infrastructure debt. These G-secs will need to have a residual maturity of at least three years and no lock-in period. Meanwhile, the corporate bonds will have a lock-in of one year and a residual maturity of at least 15 months. Also, new classes of investors, including sovereign wealth funds, insurance funds and pension funds will be allowed to participate in this auction.
So far in 2012, FIIs have pumped in Rs 24,000 crore into the debt market.
