Money & Banking

Foreign banks buy up bulk of State govt debt

PTI Mumbai | Updated on January 22, 2018 Published on November 24, 2015


₹30,000 cr of the ₹35,000 cr bonds on offer in October, picked up by 3 banks

Three banks snapped up almost 90 per cent of bonds sold by State Governments to foreigners, and turned them into derivatives, raising the prospect of more volatility in one of Asia’s best-performing debt markets.

Several market participants involved in the sale said offshore units of Nomura, Standard Chartered and Bank of America Merrill-Lynch bought about ₹30,000 crore ($451 million) of the ₹35,000 crore on offer in October, the first window for foreigners to buy in.

Much of that debt was then sold for a hefty fee as derivatives, known as total return swaps, to offshore clients keen for the bonds’ higher yields, compared with India’s already popular sovereign debt, and with similar guarantees.

In contrast, traditional buyers of the illiquid bonds are State-run banks, which hold the debt to maturity. When contacted by Reuters, the three banks declined to comment.

Resilient market

India has been one of the most resilient emerging markets, with foreign buyers taking up about $9.7 billion of debt this calendar year, nearly exhausting available limits on sovereign debt purchases.

Those purchases have helped domestic debt return 7.8 per cent so far this year, the highest in Asia, according to HSBC.

Given the appetite and a need to expand its investor base, India let foreigners buy State bonds and also relaxed the investment ceiling in government bonds by around ₹56,000 crore in September: the first step in a gradual opening.

“The main objective of (the Reserve Bank of India) in opening these limits is to attract diverse and new sets of investors to the Indian bond market,” said a senior foreign bank treasury official based in Mumbai.

“But if eventually the FII (offshore) units of the foreign banks in India get to corner the limits, elbowing out the long-term investors, then that leaves open a big risk of these trades unwinding and disrupting the Indian debt market.”

India’s central bank has sought to discourage “bond tourists”, favouring what it calls “real” investors, who would not flit in and out of the market.

Although currency and market risks have been passed on to other buyers, a sharp sell-off could see these investors re-selling the derivatives back to the banks and forcing them to swap the debt or sell at a discount.

But with foreigners owning only 4 per cent of Indian government debt versus 47 per cent in Indonesia, the impact of even a significant sell-off would likely be muted.

The next window for foreigners to buy State Government debt is on January 1.

Published on November 24, 2015
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