Reports indicate that Foreign institutional investors (FIIs) are investing more in equities than in debt. Some analysts opine that FIIs are more comfortable with equities because there are no restrictions there. Moreover, arbitrage opportunities in debt may have reduced, they opine.
Bankers said the overall cost for an FII to invest in Indian debt comes to around 7-8 percent on a fully hedged basis. A bond yield lower than that may not attract investment.
FIIs have invested only a part of their investment limit on bonds secured in the recent auctions. While these investors bought limits worth $3.2 billion on September 20, they made incremental investment of only around $1.7 billion in debt instruments even after 90 days.
RBI gave FIIs 45 days to invest once they acquire limits in government bonds and 90 days in corporate bonds. Thus in the present case, a part of the limits acquired has been allowed to lapse. Further, even as FIIs had bought fresh limits worth $3.5 billion through the auction on October 20, they held unused limits worth $4 billion at that time.
In the January 21 auction, FIIs bought limits worth around $3.3 billion even as they held unused limits worth $2.8 billion. Since the auction, FIIs have net purchased just $770 million worth of Indian debt. During the same period, FIIs have invested close to $4.4 billion in shares.
Bond yields have eased over 15 basis points since January, making them less attractive to invest. Sebi will auction limits worth $12 billion on February 20.
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