Foreign portfolio investors can now buy more Indian government and corporate debt.
The Reserve Bank of India said it would increase the FPI investment limit in central government bonds to 5.5 percent in 2018-19 from 5 percent in two tranches, according to a notification on the central bank’s website. The FPI limit would then be increased to 6 percent of the outstanding stock in 2019-20.
RBI decided not to raise the limit for FPI investment in state development loans. That was kept unchanged at 2 percent.
The overall limit for FPI investment in corporate bonds will be fixed at 9 percent of the outstanding stock, the central bank said. The FPI limit in corporate bonds would hence go up to Rs 2.66 lakh crore in the first half of fiscal 2018 from Rs 2.44 lakh crore currently. That would again be raised to Rs 2.89 lakh crore in the second half of 2018-19.
The decision to raise the caps comes at the start of a financial year in which the government will seek to borrow more than Rs 6 lakh crore from the markets. This against the backdrop of tightening liquidity conditions and subdued demand for government debt from local banks.
The FPI limit hike is "somewhat smaller" than market expectations and will temporarily dampen bond yields further, according to Aditi Nayar, principal economist at ICRA Ltd. The revised limits also mean that aggregate foreign investor inflows into debt are likely to ease in the current fiscal from a three-year high of $19 billion in the year ended March 2018, Nayar said in an emailed note.
In ICRA’s view, the 10-year G-sec yield is likely to trade in a range of 7-7.3 percent in the remainder of Q1 FY2019, before rising to 7.3-7.6 percent in Q2 FY2019, as the outlook for the government’s fiscal trends, domestic inflation and FPI appetite for G-sec become clearer.Aditi Nayar, Principal Economist, ICRA
She said that the trajectory of bond yields will be dominated by the government's borrowing plan for the second half of the financial year, risks of fiscal slippage, the demand for domestic credit from other sources, and interest rate action by central banks around the world. But the appetite of foreign investors for Indian debt “remains to be seen” given the expectation that central banks around the globe will tighten monetary policy, she added.
The RBI last announced a road map for foreign investment in government debt in September 2015. At the time, it had said that foreign investors would be allowed to hold up to 5 percent of central government bonds in stages. That limit has now been exhausted.
General category foreign investors currently hold Rs 1.91 lakh crore of central government bonds, according to data available on NSDL. The limit in this category is completely used. Some room is available for long-term investors, such as sovereign wealth funds and pension funds, which have a separate quota.