FPI limit in G-Sec hiked to 5%; to bring in addl Rs 1.2L cr

The Reserve Bank today relaxed curbs on foreign ownership of government debt by raising the cap to 5 per cent, a move that will bring in an additional Rs 1.2 lakh crore in Government Securities (G-Sec).
Foreign institutional holdings in G-Sec will be denominated in rupees instead of dollars and the cap will be raised in phases to 5 per cent of outstanding debt by March, 2018, RBI said in its fourth bi-monthly monetary policy for the current fiscal.
According to Finance Ministry estimates, foreign institutional holdings in G-Sec is about 3.8 per cent and RBI said the increase in cap will help attract Rs 1.2 lakh crore.

The move comes ahead of the US Federal Reserve's much anticipated rate hike, the first in over nine years, that may impact emerging markets.
"The limits for FPI investment in the central government securities will be increased in phases to 5 per cent of the outstanding stock by March, 2018.
"In aggregate terms, this is expected to open up room for additional investment of Rs 1,200 billion in the limit for central government securities by March, 2018 over and above the existing limit of Rs 1,535 billion for all government securities (G-sec)," RBI Governor Raghuram Rajan said.

Setting out the new medium term framework (MTF) for FPI (foreign portfolio investor) limits in debt securities, RBI said this is being done with the objective of having a more predictable regime for investment by FPIs.

The move is aimed at avoiding a repeat of 2013 when US Fed's signal that it would end its bond purchases resulted in investors pulling out about USD 9 billion from G-Sec in June-August that year, leading to the rupee plunging to historic lows.
Meeting a long pending demand of state governments, the RBI also said that there will be a separate limit for investment by FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2 per cent of the outstanding stock by March, 2018.
This would amount to an additional limit of about Rs 50,000 crore by March, 2018.

Talking to reporters, Economic Affairs Secretary Shaktikanta Das said there is no formal limit but the current operating limit is about 3.8 per cent of the outstanding stock which will go up to 5 per cent of the outstanding stock by March, 2018.
He said roughly Rs 26,000 crore will flow into the G-sec market in the current year 2015-16.
"We expect this would provide additional liquidity to the G-Sec market and this also should result in softening of the yields from the current rate which we are running," Das said.