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In a bid to attract long-term investors in government bonds, the Reserve Bank of India (RBI) in consultation with the government has enhanced the sub-limit available to long-term investors by $5 billion. This shall take the limit to $10 billion, though the total limit for Foreign Institutional Investors (FIIs) in government bonds remains unchanged at $30 billion.
“It has now been decided, in consultation with government to enhance, with immediate effect, the existing sub-limit of $5 billion available to long term investors registered with Sebi – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/ Insurance/ Endowment Funds and Foreign Central Banks for investment in government securities to $10 billion, within the total limit of $30 billion available for foreign investments in Government securities,” said RBI on Wednesday.
In June 2013, the FII limit in government bonds was increased by $5 billion to $30 billion for increasing overseas capital inflows for strengthening the rupee.
Enhancing this long-term investment limit will help to attract foreign flows and arrest volatility in the currency market. In the recent past the volatility in the rupee was caused by short-term dollar flows which domestic markets attracted at the start of this month. The rupee's weakness was attributed to these short-term flows leaving the Indian shores.
Government bond dealers see this move as a sentiment booster for the bond market due to which the yield may fall by few basis points tomorrow. The yield on the 10-year benchmark government bond 8.83% 2023 ended at 8.77% on Wednesday compared with previous close of 8.75%.
However, these bond dealers also agree that it will take time for the enhanced limit to be filled up by FIIs as inflation continues to be a concern.
