The Reserve Bank of India will allow foreign institutional investors (FIIs) to invest more in government securities and corporate bonds, said Deputy Governor, H. R. Khan.
In the works is a proposal to allow FIIs to invest $5 billion each in government securities and corporate bonds without any restriction on residual maturity.
This move could help bridge the current account deficit, which had touched 4.2 per cent of GDP.
“We are slowly opening up the bond market for FIIs. The current FII investment limit in G-Sec is at $20 billion and corporate bonds is at $46 billion. Now, more or less, we have decided to increase these limits by another $5 billion each for both G-Sec and corporate bonds,” Khan said at a CII event.
According to Khan, the $5 billion increase in FII limit that has been sought is yet to be finalised. However, these limits will be allocated to only long term real money players such as sovereign wealth fund, central banks of other countries, insurance companies, and endowment funds.
The abovementioned entities will, however, not be allowed to invest in treasury bills, commercial papers (CPs) or certificate of deposits (CDs).
Khan also said the Government is expected to notify reduction in withholding tax on FII investments in rupee-denominated infrastructure bonds soon.
“In terms of ECB and foreign currency infra bonds, the Government has reduced withholding tax to 5 per cent. So, investments in rupee-denominated infra bonds, where the investor takes credit and currency risks, must also get the same benefit … it is in the offing and I hope it will be notified soon,” Khan said.
As for trading in the futures and options segment of the equity market, FIIs want G-secs and corporate bonds to be considered collateral. “That is what we are considering,” Khan said.
Further, the Deputy Governor stated the central bank was considering whether foreign investors can be allowed to participate in currency futures trading.
Khan said the RBI is considering allowing repo deals between market players via CPs and CDs