The RBI on Tuesday announced an increase in the foreign portfolio investment (FPI) limit in government securities in a phased manner, which is set to reach 5% of the outstanding stock by March 2018, thereby opening up an additional Rs 1.2-lakh-crore investment limit over the next two-and-a-half years.
The central bank also added that the limits for FPI investment in debt securities will henceforth be announced/ fixed in rupee terms. As of now, the existing FPI investment limit in G-Secs is Rs 1.53 lakh crore or $30 billion.
Moreover, the RBI permitted FPI investments in state development loans (SDLs), which will be increased in phases to a figure of 2% of the outstanding stock by March 2018. “This would amount to an additional limit of about R500 billion (R50,000 crore) by March 2018,” the release said.
It means that over the next two-and-a-half years, cumulative FPI investment limits into G-Secs and SDLs will be close to double the current limit of $30 billion allowed in G-Secs. Bankers are optimistic that foreign investor appetite for Indian papers will continue to remain robust.
Ananth Narayan, regional head of financial markets, South Asia at Standard Chartered, said currently, there is a definite appetite for Indian government bonds. “Rupee has been among the most stable currencies in the world over the past two years or so, and yields on rupee are still relatively high compared to global peers,” Narayan said.
He pointed out that as foreign holding in government debt increases to 5%, the need to ensure inclusion of Indian government bonds into global indices increases.
“Unlike Indian equity, Indian debt are off global indices, which could lead to volatility in debt flows. There are solutions that achieve this index inclusion without compromising the objectives of the authorities, and these must be pursued,” he said.
According to the policy statement, the limits for the residual period of the current financial year would be increased in two tranches from October 12, 2015, and January 1, 2016. Each tranche would entail an increase in limits by Rs 13,000 crore for central government securities composed of Rs 7,500 crore for long-term investors and Rs 5,500 crore for others; and R3,500 crore for SDL open to all FPI investors.
“The appetite for SDLs can be mixed, since they do not come with an explicit sovereign guarantee. But again since the liquidity in SDLs is far better than corporate bonds, I think FPI appetite for this segment will be reasonable,” Narayan said. However, this might prove to be a dampener to FPI interest in corporate bonds that already is seeing a drag since the beginning of this fiscal year.
“Since the investment limit in government securities has been increased, corporate bonds may see a (relative) reduction in FPI interest due to the liquidity factor in G-Sec market,” said Manmohan Singh, head of debt capital markets, India and South East Asia at RBS.
The increase in limits will be announced every half year in March and September and released every quarter.
The apex bank also said it has been decided to permit Indian corporates to issue rupee-denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt ($ 51 billion at present). There shall be no restriction on the end use of funds except a small negative list and detailed instructions are being issued separately.
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