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RBI Eases Norms For Foreign Investments In Debt 

The Reserve Bank eased investment norms for foreign portfolio investors in debt, especially into individual large corporates, a move that can help attract more overseas flows, arrest the recent fall in the rupee and boost demand for corporate bonds.

FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans and corporate bonds, but with certain limits and restrictions. The RBI increased the FPIs cap on investment in government securities to 30 per cent of the outstanding stock of that security, from 20 per cent earlier.

FPIs were allowed to invest in government bonds with a minimum residual maturity of three years.

“Henceforth, FPIs are permitted to invest in government securities (G-secs), including treasury bills, and SDLs (state development loans) without any minimum residual maturity requirement, subject to the condition that short-term investments by an FPI under either category shall not exceed 20 per cent of the total investment of that FPI in that category,” RBI said in a notification on Friday.

Short-term investments are defined as investments with residual maturity up to one year. In the corporate bond segment, FPIs are permitted to invest with a minimum maturity of three years.

The central bank has now allowed FPIs to invest in corporate bonds with minimum residual maturity of above one year. However, it has kept a condition that short-term investments in corporate bonds by an FPI shall not exceed 20 per cent of the total investment of that FPI in corporate bonds.

Also read: SEBI Extends Deadline For New FPI Limits Monitoring System

The requirement that short-term investments shall not exceed 20 per cent of total investment by an FPI in any category applies on an end-of-day basis. “At the end of any day, all investments with residual maturity of up to one year will be reckoned for the 20 per cent limit,” RBI said.

RBI said short-term investments by an FPI may exceed 20 percent of total investments, only if the short-term investments consist entirely of investments made on or before April 27, and not after that.

Following the RBI notification, market regulator Sebi withdrew last evening the minimum three-year residual maturity restriction on investments made by them in government securities, corporate bonds and SDLs.

FPIs were permitted to invest in government securities till the limit utilisation reaches 90 per cent, after which the auction mechanism was triggered for allocation of the remaining limit.

“With Clearing Corporation of India commencing online monitoring of utilisation of government-securities limits, the auction mechanism has been discontinued with effect from June 1, 2018,” the RBI said.

The RBI said investment by any FPI, including investments by related FPIs, should not exceed 50 per cent of any issue of a corporate bond. In case an FPI, including related FPIs, has invested in more than 50 per cent of any single issue, it shall not make further investments in that issue until this stipulation is met, RBI said.

“No FPI shall have an exposure of more than 20 per cent of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate),” RBI said.

It may be noted that since this RBI circular in April, there has been a dip in corporate bonds market with papers worth hundreds of crore lying with dealers for want of buyers.

The move will also help arrest the spike in call money rates after the June 6 rate hike by the central bank. The rupee has been on a falling spree and has hit the 68 levels many times in went months.

With the fed hiking rates for the fourth time earlier this week since last year and hinting at four more hikes this year, the rupee will remain under pressure, according to analysts.

Also read: Three Casualties Of A Recent SEBI Diktat: FPIs, NRIs And Indian Investment Managers