Short-term corp bonds: RBI hints at re-looking at ban on FIIs

RBI Deputy Governor H R Khan on Tuesday said the central bank could "take a bit of a chance" by allowing foreign investors to buy corporate debt of under-three-year residual maturity as its works towards deepening the nascent corporate debt market.

"The present curb is only on residual majority (of short term corporate bonds) and we will look at whether some of the areas we can see because corporate debt is slightly different from G-secs, so we can take a little bit of chance and see which are the areas where we can do it," he said addressing a capital market summit organised by Ficci here.

Khan, however, was quick to add that no view has been taken so far and that the central bank is looking at the matter as foreign institutional investors (FIIs)have been calling for a re-look at the ban on buying short-term maturity corporate bonds.

"We need foreign investments, but we are not desperate that we open our flood gates to hot money. But certainly we will see that there is a vibrancy," the Deputy Governor said.

To a question on whether the central bank is looking at amending the residual maturity clause, he said, "we will look at it but no view has been taken so far. There has been some demand, and we will see but right now nothing has been finalised."

The government had in February barred FIIs from buying corporate debt with less than three years in residual maturity, which is currently applicable for government bonds as well.

On April 1, the RBI also barred FIIs from buying government debt with less than one-year maturity to encourage longer-term fund inflows and reduce the country's dependence on hot money.

These steps were expected given RBI officials' concerns that FIIs were excessively investing in T-bills, creating concerns about sturdiness of these flows.

Khan said framework for government bonds has already been laid down till 2018 and unless there are major changes, this framework will continue.

"For corporate bonds we will see how these off-shore rupee bonds, known as the Masala bonds, how the demand is." He also said the central bank is rationalising the ECB (external commercial borrowing) framework. "We already have our comments in a draft paper. In consultation with the government, the final guidelines will be issued. A new component in the guidelines is that there will be a separate window for the long-term investors of more than 10 years."