RBI increases bond investment limit for foreign portfolio investors

The Reserve Bank of India (RBI) on Friday increased the bond investment limit for foreign portfolio investors (FPI) by a percentage point in two phases — a move that will allow foreigners about Rs 1.4 trillion of extra play in Indian bonds by the end of FY20.

“The limit for FPI investment in central government securities (G-secs) would be increased by 0.5 per cent to 5.5 per cent of outstanding stock of securities in 2018-19 and 6 per cent of outstanding stock of securities in 2019-20,” the RBI said.

Net increase in government bonds will be Rs 592 billion in two years. Corporate bonds would see their limits go up by Rs 447.8 billion by the end of FY20. 

At the end of December, FPIs held about 4.5 per cent in outstanding government bonds, but that limit was to increase to 5 per cent by March. Now, the central bank has increased it by a full percentage point. 

The RBI also said general and long-term investors would have equal share in government bond investment limit for 2018-19. Earlier, they had an investment ratio of 25:75. The revised limit will now include coupon reinvestment.

“FPIs may, however, continue to reinvest coupons without any constraint. Only at the time of periodic re-setting of limits, coupon investments would be added to the amount of utilisation,” the apex bank said.

For 2018-19, stock of coupon investment of Rs 47.60 billion as on March 31 would be added to the actual utilisation under the ‘general’ sub-category of G-secs. This coupon reinvestment arrangement will be extended to other debt categories subsequently, the RBI said. 

“We estimate that a 1 per cent increase in the cap (from 5 per cent to 6 per cent) will increase the limit in INR (rupee) terms by Rs 800 billion. This, in our view, would be meaningful for FPI bond demand and should support bond markets in FY19,” Nomura had said in a report.

However, the market may have been expecting more.

“While the hike in FPI investment limit is somewhat lower than market expectations, it will temporarily dampen bond yields further in the immediate term. Subsequently, the appetite of FPIs 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 Aditi Nayar, principal economist of Icra.

The RBI said the overall limit for FPI investment in corporate bonds will be fixed at 9 per cent of outstanding stock of corporate bonds. Earlier there was a cap of $51 billion (Rs 3.32 trillion) equivalent.

Icra now sees the 10-year G-sec yield to trade in the range of 7-7.3 per cent in the remainder of first quarter, before beginning to harden in the second quarter.

The corporate bond market has ballooned in size as better-rated companies find it convenient and cheaper to raise money from the market than from banks. The banks have also become risk averse in lending.

The RBI also discontinued all existing sub-categories under the category of corporate bonds and said there would be a “single limit for FPI investment in all types of corporate bonds”.

The limit for FPI investment in state development loans (SDLs) remained unchanged at 2 per cent of outstanding stock of securities.

“No fresh allocation has been made to the ‘long-term’ sub-category under SDLs. Of the existing limit of Rs 136 billion for this sub-category, an amount of Rs 65 billion has been transferred to the G-secs category,” the notification said.