FIIs hit limit in debt, restricted in bond futures

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Comfortable with rupee level, govt, RBI go easy on hiking cap

The National Stock Exchange (NSE) on Monday asked foreign institutional investors (FIIs) not to increase their long positions in bond futures as their ov­erall holding in government debt reached 92.82 per cent of the allowed limit.

“FIIs have invested in bond futures at a hectic pace on expectations that the yields will drop on a future date,” said an official at Fimda (fixed income and money market derivatives association of India). He said the alert was necessary as FIIs dominate the bond futures market.

The existing limit for foreign investors in bonds is $30 billion, out of which $10 billion is reserved for investors like foreign central banks, sovereign wealth funds, insurance funds and pension funds, leaving $20 billion open for other classes of investors which FIIs have used up already.

The average volume in the bond futures market on NSE stands at Rs 13,000 crore. A bond future is a contractual obligation for the holder, in this case the FII, to purchase or sell a bond on a specified date at a predetermined price, wh­­i­ch are determined when the bond is purchased.

FIIs were net sellers in the debt segment in April, but inflows picked up in May. Sebi data showed aggregate net FII inflow to equities and debt for the year crossing Rs 1 lakh crore on Monday.

NSE, the country’s biggest stock exchange, said in the circular that FIIs can invest in bond futures only after their holdings in cash and futures come below 85 per cent of the permissible limits. Vikram Dhawan, director of Equentis Capital, said existing restrictions were preventing the derivative market from deepening with an active secondary market.

“The fixed income market or the government bond market is still the dominant player in India. Unless there is two-way liquidity, there will be a concentration in certain segments. If there is a thriving derivative market, the spreads will lessen leading to a second-level participation from high networth investors (HNIs) and retail investors,” Dhawan said. The derivative market allows participants to play on the yield curve by arbitraging between the spot and the forward markets. It is an important hedging tool for banks, FIIs and domestic institutions, which have exposure to different currencies.

The G-sec market opened better on Tuesday amid value buying but gave up the gains later in the day with the yields ending 2 basis points higher. The benchmark 10–year security with a coupon rate of 8.83 per cent closed at 8.56 per cent, about one basis point higher from the previous day’s close.

There were reports that the government may raise the limit. But neither the government nor RBI has shown any hurry to increase the limit for FII flow into debt.

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