RBI may allow FIIs to buy more government bonds in two years

The Reserve Bank may look at lifting cap on foreign holding of government debt in two years, once the economy has reached its potential growth rate, Governor Raghuram Rajan has said.
"The RBI will remove limits on foreign participation in the domestic bond market 'once the world becomes excited in a more substantial way about the India story'," Rajan told Euromoney magazine in an interview.
"This could happen once the economy reaches potential output over two consecutive years and foreigners organically move to long-end maturities, giving regulators a degree of confidence about the stickiness of flows," Rajan said.
"We want a steady increase in limits -- a measured increase -- so that we understand what is happening and we see the market developing as these limits are increased. We do think FPIs (foreign portfolio investors) are extremely important to market development," Rajan had told analysts during the post-policy tele-conference on October 1.

Even though FIIs reportedly exhaust over 95 per cent of their USD 25 billion investment limit in government debt, Rajan hinted that there is no need to increase the limit immediately.
"As short term-debt rolls over, that frees up more space in government bonds and so it is not as if that space is completely shut out. Over time, we will reexamine and see what we can do," Rajan said.

Meanwhile, citing at least two incidents where the economy has stood out better as against its peers in the emerging markets, Rajan said the country is better placed to face any eventuality due to stronger macroeconomic factors.

"My sense is that we are in a much better situation relative to then (mid-2013) because there have been major changes in the country's macro stability. We have got lower current account deficit and lower fiscal deficit," Rajan told American business news television channel CNBC in the USA, on the sidelines of the World Bank Group annual summit.
Rajan said that the rupee, which had suffered in the wake of the "taper tantrums" last May through August, is stable now and has bucked the trend at least twice in the last one year.
He elaborated saying the rupee did not suffer after problems faced by the Argentina-led default for emerging market currencies this January, while markets maintained their calm again in August when there were some issues.

Speaking about inflation, Rajan reiterated that the RBI felt well positioned to hit the six per cent mark by the targeted January 2016 date and future monetary policy would be completely data-dependent.