RBI move to boost capital flows

The Reserve Bank of India (RBI) on Tuesday took steps to encourage long-term capital flows from foreign portfolio investors (FPIs) and reduce risks to them from the volatility of flows. The central bank also said it was in talks with the Securities and Exchange Board of India (Sebi) to allow foreign institutions to hedge currency risks through the exchange platform.

The move on foreign investor participation in the currency segment would help boost trading volumes on MCX-Stock Exchange, making its rights issue more attractive to investors, said the exchange's spokesperson. "Today's announcement by RBI signals the arrival of much-awaited reforms in the currency derivative segment on the exchange-traded platform. Developments such as allowing the participation of foreign institutional investors (FIIs) and extension of trade timings will give a tremendous boost to our volumes. It will also lead to stronger revenue and improved shareholder confidence during the ongoing rights issue," he said.

To encourage long-term flows, investment by FPIs in government securities (G-Secs) will be allowed only in dated securities of residual maturity periods of at least a year. The existing investment in treasury bills (short-term papers) would be allowed to taper on maturity/sale, RBI said. As the overall limit for FPI investment in G-Secs will remain unchanged at $30 billion, the investment limits vacated at the shorter end will be available at longer maturities.

To encourage longer-maturity flows, investment limits in treasury bills were capped at $5.5 billion in April 2013, while that for long-term investors was increased by $5 billion in June.

The modalities for allowing FIIs to hedge currency risks through exchange-traded currency futures in the domestic exchanges will be finalised after talks with Sebi.

The central bank said it had allowed foreign investors to hedge coupon receipts (on debt instruments) due in the next 12 months. In the case of contracted exposures, rebooking of cancelled contracts has been fully restored. RBI said it would allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to $250,000 on declaration, subject to certain conditions

Arindam Saha, director (business development), United Stock Exchange, said the room for speculation was limited. "On March 27, RBI had eased (exporter) participation on the basis of a declaration of an exposure up to an eligible limit. This will help it to manage business risks and such companies will be able to protect themselves from rupee-dollar exchange rate volatility, almost completely. It would have been better if they would have been allowed to take home the entire gains (if any), for cases pertaining to more than 75 per cent of hedged positions. Since all such position have to be physically deliverable and trading limits have ceilings, the government has, very rightly, ensured speculation hardly takes place."