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Business News/ Market / Stock-market-news/  RBI reshuffles FII debt investment limits
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RBI reshuffles FII debt investment limits

Medium-term investors can invest an additional $5 bn, limit reduced by the same amount for long-term investors

To encourage more foreign participation in Indian debt, RBI increased the FII limit to $25 billion and reduced the long-term foreign investors’ limit to $5 billion. Photo: Pradeep Gaur/MintPremium
To encourage more foreign participation in Indian debt, RBI increased the FII limit to $25 billion and reduced the long-term foreign investors’ limit to $5 billion. Photo: Pradeep Gaur/Mint

Mumbai: The Reserve Bank of India (RBI) on Wednesday readjusted the debt investment limits for various kinds of foreign investors, allowing medium-term investors to invest an additional $5 billion while reducing by the same quantum the limits for long-term investors in government bonds.

Foreign Institutional Investors (FII), who typically take positions on Indian debt instruments maturing within one to three years, have exhausted 99.6% of their investment limit of $20 billion, data from National Securities Depository Ltd showed. However, long-term investors, such as sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks, have only exhausted 22.86% of their $10 billion limit.

To encourage more foreign participation in Indian debt, RBI increased the FII debt limit to $25 billion and reduced the long-term foreign investors’ limit to $5 billion.

“The incremental investment limit of $5 billion shall be required to be invested in government bonds with a minimum residual maturity of three years," an RBI notification said.

However, RBI clarified that there will be no lock-in period and foreign investors “shall be free to sell the securities (including that are presently held with less than three years of residual maturity) to domestic investors".

Bond dealers welcomed the move as it will, in effect, increase trading in government bonds.

“This is quite a positive development for the bond market as these investors will chase five-year and 10-year papers and the yields will fall," said N.S. Venkatesh, head of treasury at IDBI Bank Ltd, and chairman of Fixed Income Money Market and Derivatives Association of India.

According to Ananth Narayan, managing director and regional head of global markets at Standard Chartered Bank, the move will allow foreign investors with a view on currency and interest rates to take positions in India.

Until April, FIIs used to enter India on a fully hedged basis, in which they used to hedge their currency risk for one to three months, as well as hedge their interest rate risk for the same period, while investing in short-term treasury paper. Indian short-term bonds offer high yields whereas the cost of hedging their positions was low enough to offer investors the possibility of making gains purely on the arbitrage.

However, this was seen as a source of potential volatility and hence in its first bi-monthly monetary policy review in April, RBI barred FIIs from investing in treasury bills. Instead, RBI said that foreign investors should only invest in paper with a residual maturity of one-year or above.

FIIs can still find instruments to hedge their one-year exposure and invest up to $20 billion, their preferred mode of operation. But for the new investment limit of $5 billion, the residual maturity should be at least three years, against which there is no proper hedging instrument in the market.

Which means, according to Ananth Narayan, that RBI is encouraging genuine investors.

“This will flush out lot of hot money from the market because encouraged by this move, foreigners can start investing in Indian bonds through intermediaries registered here. Slowly, this practice will enhance the genuine investor base," said Ananth Narayan.

The absence of a lock-in period would also mean the investors don’t have to worry about getting stuck in case rates move adversely,, which is a very positive step in developing the bond market, said Venkatesh and Narayan.

Economic affairs secretary Arvind Mayaram had hinted about such a development in New Delhi on Monday. Bond yields had fallen about eight basis points on Monday after his remarks as prices rose on the development. One basis point is one-hundredth of a percentage point.

The yield on the 10-year bond closed at 8.663% on Wednesday, lower than its Friday’s close of 8.771%.

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Published: 23 Jul 2014, 06:01 PM IST
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