RBI raises short-term investment limit of FPIs to 30% from 20% of portfolio

With foreign investors dumping Indian debt but keeping up their investment in equities, the Reserve Bank of India (RBI) on Thursday increased the short-term investment limit of such investors. It doubled the limit in case they voluntarily disclose their investment plan before hand.

In two separate notifications, the central bank said foreign portfolio investors (FPIs) can now invest 30 per cent of their portfolios in central and state government securities, including in treasury bills, from the 20 per cent earlier.

Similarly, in corporate bonds, too, short-term investments can now be 30 per cent of the portfolio from 20 per cent earlier.

The FPIs have long lobbied against raising short term limits. Getting locked in investments, maturing in three years, is detrimental to the interest of portfolio investors who chase high short-term yields. They expect the currency to remain stable during their investment period. 

The investors not only take currency risk in the period, but also face the issue of rising yields.

Now that the RBI’s rate cutting cycle is nearing an end, the yields are expected to rise. As yields rise, prices of bonds fall, causing losses to investors.

Besides, the central bank encouraged foreign investors to invest in debt instruments issued by asset reconstruction companies (ARC), and by an entity under the corporate insolvency resolution process. 

These securities, from now, would be exempted from short-term investment limits. Earlier, only security receipts were exempted.

Meanwhile, the central bank doubled the investment cap under the voluntary retention route (VRR) to Rs 1,50,000 crore from Rs 75,000 crore earlier. “FPIs that have been allotted investment limits under VRR may, at their discretion, transfer investments made under the general investment limit to VRR,” the central bank said in a statement.

FPIs will also be allowed to invest in exchange traded funds or ETFs that invest only in debt instruments, the RBI said.

However, bond dealers say increasing limits won’t help retain investments immediately.  This is because about 30 per cent of the total investment limits in government securities and nearly 45 per cent in corporate bonds remain unutilised by foreign investors. “These won’t help much. A healthy set of budget numbers should work much more than these relaxations,” said a senior bond market observer, requesting anonymity.

In January so far, FPIs have sold $1.6 billion of their investments in government debt papers, after selling a total of $1.2 billion in November and December.  Investors are seeking more clarity on budget numbers and want to see how much the RBI can support the yields, which have been rising even after persistent special open market operations (OMO).

On Thursday, one such OMO took place where the central bank managed to buy its planned Rs 10,000 crore medium and long term bonds, but sold only Rs 2,950 crore of short-term bonds against the planned Rs 10,000 crore. 

This is even when the central bank received bids of up to Rs 35,375 crore against the bonds on offer. The RBI doesn’t receive bids in which the market yields are not in its comfort zone.

MONEY MATTERS

• Short-term investment limit raised to 30% from 20% of the portfolio
• Investments under VRR doubled to Rs 1.5 trillion
• Debt papers issued by ARCs or firms under bankruptcy resolution exempted from short-term limits
• RBI sells less than Rs 3,000 crore short-term bonds in special OMOs