FIIs lap up debt in September as govt readies to borrow more
Foreign institutional investors (FIIs) have turned net buyers of government debt after six months of selling, anticipating that the central bank will try to soften long-term bond yields to support the government’s massive borrowing programme.
Net purchases of debt securities by FIIs this month stood at $543.2 million till 25 September, compared with net sales of $470.2 million in the previous month, data compiled by Bloomberg showed.
Experts attributed the buying to the Reserve Bank’s recent moves to keep long-term bond yields from spiking ahead of the coming borrowing calendar, which is likely to increase significantly from the preceding years given the current economic scenario.
In the past few weeks, RBI has kept a close watch on bond yields and refused to accept bids in the last four government bond auctions where the yield did not match its expectations.
“Ahead of the second half borrowing schedule, expectations are high that any volatility in the debt space will attract the central bank’s hand to cap yields,” said Radhika Rao, an economist at DBS Bank. Rao said that apart from attractive returns, investors also see authorities turn more tolerant of currency gains in recent weeks, which likely helped attract offshore inflows.
As the pandemic strains government’s finances, its borrowings have exceeded the budgeted estimates for the year to 31 March. The target is to borrow an additional ₹5.02 lakh crore in the October-March period to meet expenditure as tax collections remain sluggish. The total amount raised so far this year has been ₹7.7 lakh crore, or 82% higher than the corresponding period last year, Care Ratings said in a report on 25 September.
“I would say it is more of confidence on RBI’s present balance sheet and the exchange rate. Probably, the forex reserves are also giving it some fillip as it gives some comfort that even if there is a panic selling or withdrawal of investments from India, the central bank had enough dry powder to intervene,” said Ashutosh Khajuria, executive director and chief financial officer, Federal Bank.
According to Khajuria, the FII interest is also because of the abundant liquidity available in the overseas market with investors looking at Indian debt as an investment opportunity.
“If rupee remains stable, the kind of long-term and stable money flowing into India because of some recent FDI deals like Reliance Retail or Jio Platforms or even the stressed asset funds bringing in money, people think that there is a good opportunity right now,” he said.
The central bank has reiterated that financial market conditions have eased across segments in response to the front-loaded cuts in the policy repo rate, coupled with the infusion of liquidity.
While the yield on 10-year government securities benchmark surged by 35 basis points in August amid concerns over inflation and a further increase in the supply of government papers, RBI’s announcement of special open market operations (OMOs) has led to a softening in September, RBI governor Shaktikanta Das said on 16 September.
The 10-year benchmark bond yield stood at 6.057% on 28 September.
Others are not so confident that foreign investors’ outlook on India has changed to the extent that they would be bullish on Indian debt.
According to a treasurer at a foreign bank, there is no provocation for FIIs to buy government securities at the moment, considering there is no rate cut in the offing.
“We do not even have a monetary policy committee yet,” the treasurer said.