FIIs continue to clamour for higher limit in gilts

Debt investors expect RBI to ease limits by $5bn after the budget; ratings revision & higher interest differential to make Indian debt popular choice

Global debt investors are expecting a revision in India's sovereign ratings, if the expected improvement in macro numbers play out. This possibility has created a clamour for Indian sovereign paper among foreign investors.  The $30 billion limit set for foreign investors in government treasuries has already been exhausted and overseas debt investors have been seeking a hike of another $5 billion to the limit. Bank of America Merrill Lynch, which met 18 debt and currency investors in London last week, has found that "foreign investors are eagerly awaiting a hike in G-sec limits." 

The brokerage expects the limit to be hiked by $5 billion after the Union Budget as the Reserve Bank of india is likely to cut rates further (100 basis points BofAML estimates). Bank of America Merrill Lynch's economics team expects another cut in interest rate by April after which the RBI will wait and watch how oil prices play out and whether the Federal Reserve starts to normalise its monetary policy.

Even if the Fed does hike interest rates, Indian debt may continue to be attractive as the differential between RBI and the Fed's policy rates will be higher, says BOFA Merrill Lynch, as India's lower import cover raises the risk premia for the rupee. If the RBI continues to buy dollars at the current rate, then India can build enough reserves for a 10-month import cover by March 2016.