RBI to take calibrated approach to raise FII cap in govt bonds

The Reserve Bank of India (RBI) would approach the issue of increasing foreign institutional investment limit in government bonds in a calibrated manner, RBI Deputy Governor, H R Khan, said .

Currently, foreign institutional investors (FIIs) are allowed to invest up to $10 billion in government bonds, and the limit has been almost exhausted in the first half of 2011-12.

“We are not ruling it out, we are moving in a calibrated manner. I have no comments on the time frame,” Khan said at the sidelines of Bancon, a banking seminar.

The government and the central bank are in talks to increase the FII limit, since yields on government securities hardened following the government’s enhanced borrowing plan. The government has announced extra borrowings of Rs 53,000 crore in the October-March period.

“There are views on foreign funds coming to the debt market. We have a hierarchy of flows. The first preference is foreign direct investment, which is a stable source of funds. The second are FIIs, ant the third is debt,” Khan said. “In debt, we are moving in a calibrated manner, because given the inflation and interest differential, there would be a possibility of hot money coming in, or a possibility of sudden stops,” he added.