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There is a gap between intention and action, as far as foreign institutional investors’ investment in government securities goes. While they have been eager to buy the auctioned limits for investment in bonds, these have not always translated into investment.
FIIs need to bid for investment limits in debt securities auctions conducted periodically by the Securities Exchange Board of India, after which they can invest in the bond market.
On Monday, SEBI auctioned limits in government securities worth Rs 23,661 crore.
Intent to buy
Foreign investors bid for Rs 25,905 crore of limits. However, this does not mean FII funds will gush into the bond market. For instance, in the auction in April and May, FII interest was high.
In May especially, before the exodus of FIIs from the debt market, the bid amount was nearly twice the limits auctioned by SEBI then.
Even in June, 93 per cent of the Rs 42,000 crore auctioned was lapped up by FIIs.
However, foreign investors have pulled out close to $3 billion from the debt market in 2013 so far. This is almost 11 per cent of the total investment made by them in the debt market so far.
Pick and choose
One way of gauging FII interest in government securities, is to look at the debt utilisation level.
According to the latest numbers, the FIIs have used only 53 per cent of the total Rs 1,24,432-crore limit available in government securities.
This means that while FIIs had mopped up G-sec investment limits worth Rs 44,700 crore in May and June , they did not use this to buy bonds. FIIs have a 45-day window to invest post-auction.
Typically, FIIs bid in bps — basis points (one hundredth of a percentage point) — premium to the actual yield.
If they believe that the bonds are undervalued they may bid at a higher premium.
For the current auction, FIIs bid at a premium of 0.05 bps. This is higher than the premium of 0.0001 bps they bid at in June.
However, the current premium is far lower than the 10.25 bps they paid in the May auction.
Since then, the yields on the 10-year G-Sec have fallen by nearly 70 bps.
Thus, a low premium indicates a ‘wait and watch’ approach by FIIs.
>radhika.merwin@thehindu.co.in
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