RBI to allow Rs.1,200 bn additional foreign investments in government bonds

The Dollar Business Bureau

The Reserve Bank of India has decided to increase the investment limits in government securities for foreign portfolio investors (FPI) up to 5% of the outstanding stock by March 2018. “In aggregate terms, this is expected to open up room for additional investment of Rs.1,200 billion in the limit for central government securities by March 2018 over and above the existing limit of Rs.1,535 billion for all government securities (G-sec),” the RBI said in its bi-monthly monetary policy statement on Tuesday. The move is aimed at having a more predictable regime for investment by the foreign portfolio investors (FPI). Besides, the limits for FPIs in debt securities issued by state governments, also known as State Development Loans (SDLs), will be increased up to 2% of the outstanding amount of the bond. The limits will be increased in phased manner. “This would amount to an additional limit of about Rs.500 billion by March 2018,” the RBI said, adding that the increase in limits will be announced every half year in March and September and released every quarter. Financial market analysts see it as a bold step, especially in the wake of expected hike in interest rate by US Federal Reserve later this year, which is likely to trigger mass fund outflow from emerging markets. The RBI, however, clarified that the existing requirement of investments made in G-sec (including SDLs) with a minimum residual maturity of three years will continue to apply. It also said that 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 of up to Rs.130 billion for central government securities and Rs.35 billion for SDL. The central bank has also decided to fix the limits for FPI investment in debt securities in rupee terms.