India marginally eases foreign investment limits in debt markets

By Suvashree Choudhury

MUMBAI (Reuters) - The Reserve Bank of India (RBI) marginally eased foreign investment limits on debt purchases for this fiscal year and next, in a move that is likely to boost bond and currency markets.

The size of the move, widely expected in the markets for the last few weeks, was however less than investors had expected.

In a statement on Friday, the RBI said the foreign investment limits in Indian government bonds will be 5.5 percent of total outstanding securities in the fiscal year that began April 1.

This will allow foreign investors to buy 270 billion rupees ($4.16 billion) worth of fresh securities in the current fiscal year. The existing limit was 5 percent.

The limit will be raised to 6 percent in the next fiscal year, 2019/20, the RBI said.

However, the extent of the increase was lower than market expectations of 6 percent in the first year and 7 percent in the following year.

The central bank has typically been cautious in relaxing bond limits for foreign investors to prevent sharp volatility from flows that could disrupt macro-economic stability.

"This is too little, but whatever comes is welcome given the attractiveness of Indian debt to foreign investors," said a senior foreign bank trader dealing with offshore investors.

"This will give some confidence to foreign investors but not necessarily that they will aggressively buy on day 1."

Markets are likely to post modest gains on Monday.

The 10-year benchmark bond yield could ease by 5-7 basis points on Monday compared to Friday's close of 7.17 percent while the rupee may also strengthen marginally from its close of 64.9750 to the dollar, traders said.

The RBI also lifted foreign investment limits in corporate bonds to 9 percent of total stock. This will allow investors to buy up to 445 billion rupees ($6.85 billion) of corporate bonds in 2018/19, the RBI release showed.

Foreign investors have piled into Indian debt since last year, attracted by a strong rupee and high domestic yields. That had led to foreign investors almost fully utilising bond limits.

However, with the rupee underperforming its Asian peers in early 2018 and some concerns over India's fiscal and current account deficits, foreign investors are likely now to exercise more caution.

"The appetite of foreign portfolio investors for investing in Indian debt over the course of the year remains to be seen, given the expectation of continued monetary tightening by some global central banks," said ICRA Ratings' Principal Economist Aditi Nayar.

(Additional reporting by Tanvi Mehta in Bangalore; Editing by Adrian Croft)