The Reserve Bank of India has clarified that foreign investors can also invest in treasury bills along with government securities of all maturities. The clarification followed a revised framework for foreign portfolio investment in debt released by the regulator on Friday.
As per the revised framework, foreign investors can invest in government debt without any residual maturity restrictions. In 2014, the RBI has said that foreign investors can only invest in government securities with a residual maturity of three years. The restriction had been put in place after foreign investors sold short term Indian debt heavily once the U.S. Federal Reserve indicated that it will start to taper down its quantitative easing program.
The heavy selling, particularly in the t-bills segment, added to weakness in the Indian currency which was already under pressure due to weak macro economic conditions.
The regulator has now reopened t-bills to foreign investors. However, some safeguards have been kept in place.
“Investment in securities with residual maturity below one year by an FPI shall not exceed, at any point of time, 20 percent of the total investment of that FPI in that category,” said the RBI.
Bond market participants expect the RBI’s move to lead to a short term drop in yields on shorter term securities.
“The relaxation of FPI rules could ease pressure on the front end, but relief will only be tactical, in our view, as rate hike expectations and oil price uncertainty still weigh on the bond markets. As such, we remain neutral on Indian bond markets,” said Nomura Research in a note on Monday.