Mumbai: The Reserve Bank of India (RBI) on Friday announced an increase in limits for foreign portfolio investors (FPIs) to buy Indian government and corporate bonds, a move likely to spur demand for securities and lead to a fall in bond yields.
The revised limits, decided by RBI in consultation with the government, have been announced under a new framework as the old one expired last month.
RBI said the limit for FPIs to buy central government securities will be increased to 5.5% of the outstanding stock of securities in 2018-19 and 6% of the outstanding stock in 2019-20. Accordingly, for buying government bonds under the general category, the revised limit stands at Rs2.07 trillion for the first half of fiscal 2019 and at Rs2.23 trillion for the second half. The current limit is Rs1.91 trillion.
Limits have also been raised for FPIs under the long-term category, which includes central banks, sovereign wealth funds and multilateral agencies. The revised limit is Rs78,700 crore for the first half of 2018-19 and Rs92,300 crore for the second half. The current limit is Rs65,100 crore.
The total limit for FPIs to buy bonds—central government, state development loans and corporate bonds—has been revised to Rs5.95 trillion for April-September from Rs5.46 trillion currently. The limit would be Rs6.5 trillion for the second half of 2018-19.
According to bond dealers, the announcement is likely to boost appetite for bonds and lead to a fall in yields, which dipped after the government announced lower-than-expected borrowing for the first half of fiscal 2019.
RBI’s announcement of 2 April, when it allowed banks to spread mark-to-market provisioning for losses incurred on bond portfolios over four quarters also led to a fall in yields.
According to Ajay Manglunia, executive vice-president and head-fixed income at Edelweiss Financial Services, demand from FPIs is expected to be encouraging because of stability in the currency, as it helps them lower the cost of hedging their investments.