Gilt prices crash as investors fear FII selloff

Tags: News

Yields soar on oversupply of papers

Yields on government bonds soared on Wednesd­a­y to a four-mo­nth high of 9.12 per cent, highest since November 22, 2013, amid fears that foreign instit­utional investors (FIIs) mi-­ght pull investment from domestic treasury bills after the central bank disallowed them in short-term debt.

Rising funding cost of banks and an oversupply of government debt papers h­ave also hurt bond prices. FIIs have invested $4.3 billion in treasury bills this year. The benchmark 10-year bond ended the day at 9.03 per cent, recouping some of the losses.

In its bi-monthly money policy on April 1, the Reserve Bank of India banned FII investment in short-te­rm debt maturing in less than a year to stop hot money flow as a defence for rupee.Instead, the central bank guided FIIs to government securities maturing in one year or more.

“The existing investment in treasury bills will be allowed to taper off on maturity or they will have an option to sell. But the overall limit for FPI investment in government securities will continue to be $30 billion, meaning investment limits vacated at the shorter end will be available on those with longer maturities," RBI said in the policy document.

Harihar Krishnamoorthy, treasurer at First Rand Bank, said: “Yields have been rising ever since RBI cut the overnight borrowing limit for banks to just a quarter of the total deposits in the banking system and also on fears that the $4.3 billion FII money that was invested in treasury bills may not get rolled over to long-term securities as there is no serious interest rate advantage in longer maturity bonds."

First Rand Bank is a South African lender with Indian operations.

According to the Securities and Exchange Board of India (Sebi) data, FIIs pumped in $10.24 billion into Indian equity and debt markets till April 6. Of this, about $5.61 billion was invested in debt and the rest $4.63 billion in equities.

Jayesh Mehta, managing director and head of fixed income at Bank of America-Merrill Lynch, blamed it on the oversupply of government papers.

“The market need not worry about outflow of FII money. On the maturity of existing securities, they will reinvest them in longer-term government as well as corporate bonds. The oversupply of government papers, which have fewer investors, is pushing up yields.”

As part of the government borrowing programme, RBI auctions Rs 16,000 crore bonds and Rs 15,000 crore treasury bills every week. On Wednesday, state governments auctioned Rs 5,000 crore bonds.

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