Mumbai: The Reserve Bank of India (RBI) on Tuesday capped investments by foreign portfolio investors (FPI) in shorter maturity corporate bonds, three days after it eased rules on purchases of Indian securities by foreigners.

The central bank said that investment by an FPI in corporate bonds with residual maturity of below one year is capped at 20% of that foreign investor’s total holding of corporate securities.

The condition of 20% cap was introduced when RBI, late on Friday, withdrew a rule that mandated FPIs to invest in government bonds and state development loans with at least three years of residual maturity.

On the same day, it also allowed FPIs to buy corporate bonds with above one-year residual maturity, against three years earlier. However, no such cap was stipulated for investment in securities with residual maturity below one year for FPI investments in corporate bonds.

The central bank said it has introduced the cap for corporate bonds “in order to bring consistency across debt categories....".

The central bank also clarified that FPIs are permitted to invest in treasury bills. Treasury bills, popularly known as T-bills, are securities maturing in below less than one year, sold by the government.

The 20 investment norm on bonds across categories is applied on a continuous basis, RBI said.

“At any point in time, all securities with residual maturity of less than one year will be reckoned for the 20% limit, regardless of the maturity of the security at the time of purchase by the FPI," it said.

In case the investment is above 20%, the RBI said that FPIs must bring down the holding to below 20% within six months, starting Tuesday. Until then, FPIs are barred from buying bonds with less than at least one-year maturity either through fresh purchases or through roll-down of investments with a current tenor of more than one year.

Following Friday’s relaxation, bond yields in the domestic market are seen falling on Wednesday, when the market opens after an extended weekend.

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