Market wants FII limit reset in govt debt to reflect exchange rate reality

The Street wants the government and the Reserve Bank of India (RBI) to enhance foreign institutional investors' (FIIs') limit in government debt, keeping in mind the present conversion of the rupee against the dollar. The raise in the investment limit would attract more FIIs in government bonds, leading to softening of yields.

On Tuesday, RBI Deputy Governor H R Khan said in New Delhi the central bank is in talks with the government on resetting the FII debt limit though he refused to give a timeline for the same. Earlier this month, RBI Governor Raghuram Rajan had said the FII limit would be revised twice a year and efforts were being made to make such investment easier.

In June, Finance Secretary Rajiv Mehrishi had said the finance ministry was in favour of fixing the FII limit for G-secs in rupee terms instead of dollar terms. This would provide more headroom for FIIs' investment in G-secs.

"Currently the dollar-rupee reference rate for the $30-billion conversion for FII limit in G-secs is around Rs 51 to a dollar. If this limit is converted in rupee terms and keeping the present conversion of the rupee, the limit can be enhanced by Rs 36,000 crore (approx $6 billion). In my view, even if this change happens, it will not be opened up in one go. The limit will be enhanced in a calibrated manner to avoid excess volatility," said Manish Wadhawan, managing director and head of interest rates at HSBC India. Wadhawan added that the enhancement of Rs 36,000 crore will happen if the rupee-dollar value is taken at 63.50.

In July 2014, RBI had raised the FII sub-limit in government bonds by $5 billion, after the existing $20-billion limit was almost exhausted. However, the overall limit for FII investment in government bonds was kept unchanged at $30 billion.

"With the RBI deputy governor saying on record that they are discussing with the government means this is a work in process. Hopefully, this may happen in the next two-three months. If this happens, then it would have a good impact on the demand by FIIs for G-secs," said Ashutosh Khajuria, executive director, Federal Bank.

MAKING PEACE WITH Rs/$

• On Tuesday, RBI Deputy Governor H R Khan said in New Delhi the central bank is in talks with the government on resetting the FII debt limit though he refused to give a timeline for the same
  

 

A raise in the investment limit would attract more FIIs to government bonds, leading to softening of yields
 

Earlier this month, RBI Governor Raghuram Rajan had said the FII limit would be revised twice a year and efforts were being made to make such investment easier
 

In June, Finance Secretary Rajiv Mehrishi had said the finance ministry was in favour of fixing the FII limit for G-secs in rupee terms instead of dollar terms