The Reserve Bank of India (RBI) has raised the foreign institutional investors' (FIIs') sub-limit in government bonds by $5 billion, after the existing $20-billion limit was almost exhausted. The move is expected to stabilise yields, volatile in the recent past.
The overall limit for FII investment in government bonds has been kept unchanged at $30 bn. As a result on the rise in the sub-limit, that for long-term investors like insurance and pension funds will be reduced to $5 bn.
RBI said the incremental investment limit of $5 bn shall be required to be invested in government bonds with a minimum residual maturity of three years. Besides, all future investment against the limit vacated, when the current investment by these foreign investors runs off either through sale or redemption, shall also be required to be made in government bonds with a minimum residual maturity of three years.
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“The bond market was expecting this for some time. This is a positive step. The yields can drop by another three to five basis points tomorrow. But this FII money will come only over a period of time. We also need to see the operational guidelines to be issued by Sebi (the capital markets regulator),” said Siddharth Shah, vice-president, STCI Primary Dealer.
RBI however, clarified that there will be no lock-in period and FIIs, qualified institutional investore and foreign portfolio investors shall be free to sell the securities (including those currently held with less than three years of residual maturity) to domestic investors.
“There was one segment of this limit, sovereign wealth fund, which was not getting utilised. So, expanding the limit for FIIs is a good move. This will help the bond market,” said Ashutosh Khajuria, president (treasury), Federal Bank.
The yield on the 10-year bond ended at 8.66 per cent on Wednesday, compared with the previous close of 8.69 per cent. The yield on the 10-year bond ended at 8.66 per cent on July 2 and since then in most of the trading days, the yield has been rising. The expectations of a new 10-year benchmark was leading to banks trimming their holdings in the existing 10-year bond.
The government's total borrowing requirement for 2014-15 has been budgeted at Rs 6 lakh crore or 4.7 per cent of gross domestic product. The net market borrowing of Rs 4.61 lakh crore has been budgeted to finance 86.8 per cent of the fiscal deficit. Now that the FII limit has been enhanced, banks might resort to fresh bond purchases, due to which the borrowing programme is likely to sail smoothly.