Fii Investment In Treasury Bills Cleared

The Reserve Bank of India has decided in principle to permit foreign institutional investors to invest in treasury bills, indicating governor Bimal Jalans resolve to proceed with the capital account convertibility schedule suggested by the Tarapore Committee.

According to Reserve Bank sources, FIIs will be allowed to invest in T-bills within the current fiscal. The central bank will soon be issuing a circular to this effect.

The decision was taken at a high-level RBI meeting in Mumbai recently. FIIs are already allowed to invest in dated government securities.

The Tarapore committee had recommended that FIIs be allowed to invest in T-bills in the first phase of CAC (1997-98). The committee had suggested that maturity restrictions on investment in debt instruments (including T-bills) be removed. It had added that foreign institutional investment in rupee debt securities should be kept outside the external commercial borrowings ceiling, but could be limited by a separate ceiling.

 

However, RBI sources said the bank is unlikely to place any restrictions on the quantum of investment FIIs can make in T-bills. After the notification is issued, the Securities and Exchange Board of India will have to frame operative guidelines for FII investments in this instrument, as it does for all the segments in which FIIs are allowed to invest funds, pointed out RBI sources.

The opening up of T-bills to foreign institutions is expected to result in increased portfolio investment in India. According to RBI sources, some of the FIIs had earlier approached the central bank requesting it to open up this segment.

The Reserve Banks move is significant as it implies a shift in the financing of the government. Apart from enabling the government to borrow foreign funds at cheap rates, the move will also help align short-term rates in India with international rates.

The central bank took the decision after studying the pattern of portfolio investment in India during the past few months. Earlier, the Reserve Bank wanted to take a decision based on foreign fund allocation in the first quarter. However, the plan was dropped as it was felt that the figures for the first quarter were exceptionally high.

The Reserve Banks decision marks an end to a heated internal debate. It was argued that allowing FIIs to participate in the T-bills segment would lead to excessive volatility. This, in turn, would mean that interest rates would be influenced by the extreme volatility. Hence, the central bank had earlier not opened up this particular segment for FII investment.

In the course of the debate, several proposals were put forward to minimise the risk of volatility if FIIs were allowed to invest in T-bills. One proposal was to put a ceiling on the total exposure that FIIs could take in this segment. However, the Reserve Bank has now decided that such restrictions may not be required and the proposal is unlikely to be implemented.