The Hindu Business Line : Bond market sees booster shot

Foreign institutional investors (FII) can now invest in Government securities up to $2.6 billion by December 31 from the existing limit of $2 billion and further to $3.2 billion by March 31, 2007. Market players believe it will energise the Indian bond markets.

"Currently, the volumes traded in the bond market are low and raising FII investments will help pushing up volumes," said Ms Bidisha Ganguly, Chief Economist, BRICS Securities-Debt Market.

Average volumes traded in October on the order matching system were around Rs 2500 crore.

"In the short-term, I expect little impact as the net return on investments in government securities after adjusting all-in cost of forex borrowing is negative," said Mr Ajay Mahajan, President - Financial Markets and Financial Institutions, Yes Bank.

"However, as a long-term measure, it is a positive for the bond market. We expect FIIs to invest when the forex cost goes under the T-bill yields, which is likely to happen in the event of extreme rupee bullishness," he said.

According to the mid-term review by the RBI, FIIs will be permitted to invest in securities issued by the Central and State governments by an incremental 5 per cent of total net issuance in the previous financial year.

"The RBI's intervention in foreign exchange market has reduced substantially in recent times. Coupled with the increased avenues for deployment of foreign exchange inflows, we believe the RBI is serious in reducing the impact of surging foreign flows on domestic liquidity, credit and final pass-through on inflation," said Mr Arpit Agarwal, Chief Executive Officer, Dawnay Day AV India Advisors Pvt Ltd.

"Although we agree with the RBI on inflationary pressures exerted by foreign flows on asset prices, we have our doubts on long-term impact on commodity inflation."

The extant limit of $1.5 billion for investment in corporate debt has not been altered.

"Since the need of the hour is to widen and deepen the corporate bond market, the RBI could have increased the limit on FII investments in that segment also," said Mr Mohan Shenoi, Group Head- Treasury, Kotak Mahindra Bank.

The RBI has allowed commercial banks and primary dealers to go short (selling securities without owning them physically). Earlier, intra-day short selling in the Central government securities was permitted.

The RBI has also okayed "when issued" trading in case of fresh issues of the Central government securities on a selective basis. "When issued" trading allows traders to take positions ahead of government auctions; after the auctions, the deals will have to be squared. Trading in "when issued" commenced in August and had been permitted in re-issuable securities.

"Auctions will now be yield based in "when issued" trading rather than price based. With a re-issued paper, the auctions took place considering the prices but now with the fresh issues the auctions will be based on yields," said Mr C.E.S Azariah, CEO, Fixed Income Money Market and Derivatives Association of India. "So, now the traders have to align their operations to buy at higher yields (lower prices) and sell at lower yields," he said.

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