FIIs fork out double commission on debt investment as business confidence shows upturn

MUMBAI: Foreign institutional investors forked out nearly double the commission to buy debt investment limit auctioned for Rs 1,488 crore on November 10, a sign of growing confidence in the government's macroeconomic policies. India sells the residual investment limits in government debt after foreign investors exhaust 90% of the overall limit.

For every Rs 1,000-crore bid, overseas investors paid a minimum of Rs 5.35 crore as commission to the Securities & Exchange Board of India; this is against the Rs 3 crore they paid in the earlier auction on October 21. Commissions surged several times since June 11 when it was at just Rs 48 lakh/1,000 crore.

“FIIs paying higher commissions only implies that India’s real interest rate is substantially higher compared to other peer countries and by historical standards,” said Sandeep Bagla, associate director, Trust Group.
“Higher commission also means there are incremental investors who are willing to invest in India... In this context, RBI may have to willy-nilly cut rates in line with emerging inflation reality sooner or later,” he added.

The prevailing sentiment among overseas investors points to a 100 basis points rate cut in the next one year, dealers said. If that happens, FIIs who are buying Indian bonds now, would book substantial profits with plunging yields. Bond yields and prices move in opposite directions.

Whatever foreign investors are paying now should be made good with the expected sharp fall in yields in the next one year, dealers said. In the latest auction, the cut-off level below which bids are not allotted stood Rs 0.5350 compared with Rs 0.3000 on October 21 auction. Consumer price index, or retail inflation, rose a slower-than-expected 6.46% from a year earlier, the lowest since January 2012.

The October inflation rate is expected to dip below 6%, which is well below 8% – RBI’s target by January next.

Some 88 FIIs bid Rs 5,564 crore although only Rs 1,488 crore limit was stipulated to be sold. In the previous auction, 66 bidders demanded limits for nearly Rs 2,100 crore against the actual at Rs 646 crore. “This time, FIIs bid for limits in big numbers, which wasn’t seen in recent times,” said Ajay Manglunia, senior vice-president, Edelweiss Financial. “The momentum would continue on the back of improving overall macroeconomic indicators creating buoyancy.”

Foreign investors have reached 99.60% of their $25 billion limit in government debt, according to National Securities Depository Ltd (NDSL) data. Additionally, the limit on long-term debt is $5 billion, of which 80.34% has been reached.