Investment limit in government securities for foreign portfolio investors hiked

Reserve Bank of India on Friday hiked the investment limit for foreign portfolio investors (FPI) in central government securities (G-Sec) from 5 per cent of outstanding stock now to 5.5 per cent in FY2019 and 6 per cent in FY2020, in move that could temporarily soften bond yields.

“After consultation with the Government of India, the limit for FPI investment in central government securities (G-Secs) would be increased by 0.5 per cent each year 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,” RBI stated.
RBI said the limit for FPI investment in State Development Loans (SDLs) would remain unchanged at 2 per cent of outstanding stock of securities.
“The overall limit for FPI investment in corporate bonds will be fixed at 9 per cent of outstanding stock of corporate bonds. All the existing sub-categories under the category of corporate bonds will be discontinued and there would be a single limit for FPI investment in all types of corporate bonds.”
RBI has not made any fresh allocation to the ‘long-term’ sub-category under SDLs. Out of the existing limit of Rs13,600 crore for this sub-category, an amount of Rs6,500 crore has been transferred to the G-Secs category.
The allocation of increase in G-Sec limit over the two sub-categories – ‘General’ and ‘Long-term’ – remains at the current ratio of 25:75. However, based on an assessment of investment interest, this ratio has been re-set at 50:50 for the year 2018-19.
RBI said the coupon reinvestment by FPIs in G-Secs, which was hitherto outside the investment limit, will now be reckoned within the G-Sec limits.
“Since this is a new policy, as a one-time measure, the investment limit in the ‘General’ sub-category of G-Secs has been increased by an amount equal to the stock of coupon reinvestment as on March 31, 2018. FPIs may, however, continue to reinvest coupons without any constraint, as they do now,” it said.
The hike comes in the wake of 99.31 per cent of the upper FII investment limit in G-Secs of Rs1,91,300 crore getting utilised. As per NSDL data, as on 5 April, the available portion of G-Secs for FPI investment was only Rs1,311 crore.
“Subsequently, the appetite of the 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.”