RBI raises FII limit in govt, corp bonds by $5 bn each

Additional capital flows expected to help tackle high current account deficit

To attract foreign funds into the bond market, the Reserve Bank of India (RBI) on Thursday raised the ceiling for foreign institutional investors (FII)’s holdings in government securities and corporate bonds by $5 billion each. The cap on domestic debt now stands at $75 billion.

Bond dealers and treasury executives said the interest of FIIs had been robust. The additional capital flows would help tackle the high current account deficit, which stood at a record 5.4 per cent of the gross domestic product in the quarter ended September.

The three-year lock-in period for FIIs purchasing government securities (G-secs) for the first time has been done away with, RBI said.

The sub-limit of $10 billion for investment by FIIs in G-secs was enhanced by $5 billion, it added, while the cap on corporate debt other than in the infrastructure sector was raised from $20 billion to $25 billion.
 

STEPS TO AID INFLOWS

• Sub-limit for FII investment in G-secs raised from $10 billion to $15 billion
• Cap on corporate debt (excluding infra) raised from $20 billion to $25 billion
• Three-year lock-in for FIIs purchasing G-secs done away with
• The cap on domestic debt now stands at $75 billion

With rises of $5 billion in each of the two categories, FIIs and long-term investors can now invest $25 billion in G-secs and $50 billion in corporate debt instruments, including the sub-limit of $25 billion for infra bonds.

RBI said though the residual maturity condition would not be applicable on the entire sub-limit (in G-secs) of $15 billion, such investments would not be allowed in short-term papers such as treasury bills.

The overall FII limit for domestic debt is distributed through a host of categories across government, corporate and infrastructure debt. Long-term investors include sovereign wealth funds, multilateral agencies, pension funds and foreign central banks.