Bond limit to be rupee-denominated: RBI Governor

To develop the country's debt markets and increase fund inflows, the central bank on Tuesday announced that it will soon change the cap on bond investment from being dollar-linked to rupee-denominated.

"Limit will change from dollars to rupees. It will be incrementally based on rupee. It will move up on an incremental basis," Reserve Bank of India (RBI) Governor Raghuram Rajan said on the sidelines of presenting the monetary policy update.

"But obviously it will bear some relationship to the current rupee investment which is already there," the governor elaborated at the central bank's Mint Street headquarters here.

According to market observers, it is expected that the move will give more space for investments in the debt markets, whose limit of $30 billion has almost been exhausted.

The one-time adjustment will create an additional space of nearly $5-6 billion of foreign investment in debt markets.

Currently, foreign portfolio investors (FPIs) can invest up to $30 billion in government debt and $51 billion in Indian private sector bonds. The dollar limit is currently pegged at Rs.49 to a dollar.

"The bonds were earlier pegged at Rs.49 to a dollar. Now they might be pegged at Rs.63-64 per dollar. This will instantly add $5-6 billion in the bond value. Though the dollar buying limit of the bonds will remain the same at $30 billion," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities told IANS.

"If things work out the way RBI has planned it, then we can expect even an enlargement of the investment limit by $2-4 billion."

Anand James, co-head, technical research desk, Geojit BNP Paribas, told IANS that by the changes in the denomination limit, the RBI will help in attracting more long term fund inflows into the markets, while at the same time keep the "hot money" or short-term investments at bay.

Meanwhile, the RBI governor further informed that the central bank is in consultations with the government to develop a framework for segregating the bond market participation limits for different players like sovereign wealth funds and general foreign institutional investors (FIIs) in the medium-term.

"This will include a target for what fraction of the bond market would be constituted by FPIs, pension funds and sovereign wealth funds, as well as medium-term investors coming through Euroclear and Clearstream," Rajan announced at a post-update press conference.

"An announcement of staggered changes will be made every six months with these being released on a monthly or quarterly basis."

Though, Rajan did not divulge the timings of such a move to take effect, he pointed-out that such a move will only be effected after taking into account interest rate hike announcement by the US Federal Reserve and the government's acceptance of such a change.