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Three banks snapped up almost 90 percent of bonds sold by Indian states to foreigners, and turned them into derivatives, raising the prospect of more volatility in one of Asia's best performing debt markets. Several market participants involved in the sale said offshore units of Nomura, Standard Chartered and Bank of America Merrill Lynch bought about 30 billion rupees ($451 million) of the 35 billion rupees on offer in October, the first window for foreigners to buy in.
Much of that debt was then sold for a hefty fee as derivatives known as total return swaps to offshore clients keen for the bonds' higher yields, compared with India's already popular sovereign debt, and with similar guarantees. In contrast, traditional buyers of the illiquid bonds are state banks, who hold the debt to maturity. When contacted by Reuters, the three banks declined to comment.
India has been one of the most resilient emerging markets, with foreign buyers taking up about $9.7 billion of debt this calendar year, nearly exhausting available limits on sovereign debt purchases. Those purchases have helped domestic debt return 7.8 percent so far this year, the highest in Asia, according to HSBC. Given that appetite and a need to expand its investor base, India let foreigners buy state bonds and also relaxed the investment ceiling in government bonds by around 56 billion rupees in September: the first step in a gradual opening. "The main objective of (Reserve Bank of India) in opening these limits is to attract diverse and new sets of investors to the Indian bond market," said a senior foreign bank treasury official based in Mumbai.

Copyright Reuters, 2015

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