RBI wants foreign investors to shift to long-term debt

Last year, the central bank barred Foreign Portfolio Investors from purchasing short-term govt securities

The Reserve Bank of India (RBI) might nudge foreign investors to longer-term bonds on concerns that once the US Fed starts raising interest rates later this year, investors might exit their investments from India, which could impact the rupee.

Experts expect the US Fed to raise rates in the current calendar year on the back of recovery in the economy.

“When we limited reinvestment in government securities below three years, we did not do the same thing for corporates because we wanted to develop a corporate bond market. There has been some of that, but there is again sitting too much at the short-end. We would like to nudge people into the longer-end. When you reinvest, you reinvest in three years and above securities,” RBI Governor Raghuram Rajan said here on Tuesday.

In order to incentivise long-term investors, RBI also enabled reinvestment of coupons in government bonds even when the existing limits are fully utilised. According to Barclays, allowing re-investment of coupons could effectively free up $2 billion for purchase of government bonds each year. It also implied that India might not raise the current overall investment limit of $30 billion for foreign investments any time soon.

Last year, RBI had barred foreign portfolio investors (FPIs) from purchasing short-term government securities. Existing investments in treasury bills by FPIs were allowed to taper off on maturity or sale. FPIs were permitted to invest in government bonds with a minimum residual maturity of three years. However, no such condition was placed for corporate bonds.

“All future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years. Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years,” RBI said in the monetary policy statement on Tuesday. The central bank also said FPIs would not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes.

“RBI wanted to ensure money inflow into the debt market is not just for the short term. The real concern for the banking regulator is the strength of the currency. While several global currencies have weakened against the dollar, the rupee has not moved much,” said Badrish Kulhalli, head of fixed income at HDFC Life.

RBI also introduced new bond futures with five-seven year maturities and 13-15 year maturities, complementing the current 10-year tenors unveiled last year.