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India's auction of unused limits that allow foreign institutional investors (FIIs) to buy long-term government bonds and corporate bonds was oversubscribed, mirroring the global interest in picking up the current high bond yields on offer. The price investors were willing to pay for the limits, however, was sharply lower than a similar auction in November, traders said.
Foreign investors bid a total of 62.54 billion rupees to secure the government bond limits compared with the 47.90 billion rupees on offer, while they bid 77.05 billion rupees for corporate bonds against 46.01 billion rupees on offer, three sources said.
The cut-off was set at 0.1015 percent for old corporate bonds compared with 0.67 percent in the previous auction in November. The government bond cut-offs were set at 0.002 percent, said traders. "The lower cut-offs in the auction is because these limits will get exhausted after a one-time use, so the price investors are willing to pay is very low," said Nirav Dalal, president and managing director of debt capital markets at Yes Bank.
The country's capital markets regulator, Securities and Exchange Board of India, in January said that if an investment of an FII matured or was redeemed, the institution could reinvest the equivalent of the original allocation only twice before January 2, 2014.
Previously, FIIs were allowed to reinvest the amount any number of times. "These limits are going to be available more frequently to investors, so there was no aggressive bidding," said Ajay Manglunia, senior vice-president of Edelweiss Securities.
The investment limit in debt for FIIs is $60 billion a year, of which $45 billion is for corporate bonds. Within corporate bonds, $25 billion is allocated for infrastructure bonds and the balance for non-infrastructure bonds. In November, the un-utilised portion of limits in long-term government securities got 22.20 billion rupees in bids against 22.48 billion rupees on offer.
Despite a fresh bout of risk aversion in emerging market and a weaker outlook on the domestic currency, the limits were oversubscribed given the attractive spreads. "The current high bond yields offered by Indian bonds are attractive to foreign investors even after hedging currency risks," Edelweiss's Mangalunia said.

Copyright Reuters, 2012

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