Foreigners expected to be cautious at India bond quota auction
MUMBAI, July 22 (Reuters) - Indian markets were bracing for disappointment at an auction of bond investment quotas on Monday, with weak demand expected from foreigners until there is clarity on the central bank's policy intentions after its dramatic attempt to shore up the rupee.
The Reserve Bank of India took unprecedented steps last week to try to create demand for the currency, which had fallen to a record low, by aggressively draining cash from money markets and sharply raising short-term interest rates.
Investors are worried the RBI, which holds a policy review on July 30, may have more surprises in store to try to support the rupee, such as increasing reserves banks must hold at the central bank or issuing offshore bonds.
That does not bode well for the capital market regulator's auction of 236.6 billion rupees ($4 billion) in government bond quotas -- the rights to buy that amount of debt -- to foreign institutional investors.
A poor outcome would keep pressure on the rupee as India has traditionally relied on foreign capital to fund its current account deficit, which hit a record 4.8 percent of gross domestic product in the fiscal year that ended in March.
"Confusion over the policy direction and limited impact on the currency from last week's RBI measures will restrain demand," said Radhika Rao, an economist at DBS in Singapore.
"Till clarity is provided at the upcoming rate review, foreign interest is likely to remain subdued," Rao added.
Last month, foreigners bought 391.71 bln rupees of debt limits, but had only used 46.2 billion rupees by July 19, National Securities Depository Limited data showed.
UNCOMFORTABLY CLOSE TO LOW
Ahead of the sale, the rupee was marginally weaker and yields were little changed after a hectic past week. The auction results are after 1730 India time (1200 GMT),
The rupee weakened slightly to 59.40 per dollar from Friday's close of 59.35. It has gained nearly 1 percent in the week since the RBI's measures but remains uncomfortably close to a record low of 61.21 hit on July 8.
The benchmark 10-year bond yield rose to 7.98 percent from Friday's close of 7.94 pct. Yields have surged around 40 basis points since the RBI's measures last Monday, with foreigners selling a net $254 million.
Foreign outflows have reached $11.5 billion in debt and equities since late May.
While some of that reflects a broad sell-off in emerging markets on signs of a winding down of U.S. stimulus, there are specific fears about India's slowing economy, lack of substantive reforms and its large current account deficit.
India has taken some steps this year to try to attract foreign investment, such as easing registration rules and increasing ownership limits for long-term investors such as sovereign wealth funds.
(Editing by John Mair)