Much-hyped government bond auctions a dud; cold response despite bargain basement prices

Hopes of strong demand from overseas investors for high-yielding Indian government bonds at a permits auction on Wednesday turned out to be a false dawn, reviving fears that the rupee could come under pressure.

Bond auction

Investors were measured in their bidding despite the Securities & Exchange Board of India (Sebi) willing to sell permits at throwaway prices compared with the high premium investors paid last December.

A hurried proposal to raise foreign institutional investors’ holding limit in government bonds by $5 billion to save the currency slide may be serving a limited purpose with a weak macro economy worrying investors.

The auction of permits for foreign institutional investors to buy government bonds worth Rs 28,496 crore received bids for Rs 20,469 crore, or 72% of the total offer, said two people familiar with the process. Bids for corporate bonds were at Rs 19,777 crore while Rs 31,387 crore worth of bond permits were on offer, they said. Sebi conducts the auction of permits for foreign investors to buy government and corporate bonds, but does not disclose the bid details.

“Investors don’t find the current environment conducive to investing in India given the twin deficits,” said Ajay Manglunia, head of fixed income at Edelweiss Financial Services, referring to excessive government borrowings and high imports that can’t be funded from export earnings. “They are unwilling to take the credit risk in such an environment. Also, the rupee has remained fairly volatile.”

The RBI, days before Pranab Mukherjee resigned as finance minister to contest for President, announced measures to boost the sagging rupee. That included raising FII limits in government bonds by $5 billion. The currency, which was the worst performer in Asia last quarter, rose 5% in four days till Tuesday.

Weak macroeconomics to blame for flop show

The rupee rallied ahead of the bonds auction, anticipating US dollar inflows due to strong investor interest. It fell 0.4% on Wednesday to end at 54.48.

(curtsey: economic times)

Rupesh Yatesh Dalal
Head Research Department

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