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The Finance Ministry has allowed foreign institutional investors (FIIs) to invest $5 billion more in Government securities. (Now, the cap is $10 billion.) The limit on corporate bonds will also be increased by the same amount.
Increasing the limit will not just benefit FIIs, but also reduce the pressure on the rupee. It is also expected to increase foreign fund flows into the Indian debt market, where the earlier limits have almost been fully utilised.
With the increased limit, more money is expected to be available with the domestic financial institutions to lend to the corporate sector. With more liquidity there is also a possibility of interest rates stabling or even going down.
At present, FIIs can invest $10 billion (Rs 43,650 crore) in Government papers, which now stands raised to $15 billion. Similarly, the cap on FII investment in corporate bonds will be raised to $20 billion.
The incremental limit will be applicable from the date of notification. The Securities and Exchange Board of India is expected to issue a circular giving effect to these changes in the next few days.
Mr Thomas Mathew, Joint Secretary, in-charge of the capital market in the Finance Ministry, said the move was needed as “We need more FIIs to come and invest in India.” Further, the existing limit was “almost exhausted,” he said.
As on October 31, FIIs invested Rs 41,253 crore in Government securities against the limit of Rs 43,650 crore. Corporate bonds managed to get Rs 68,289 crore against a ceiling of Rs 74, 416 crore. There is little space available for further FII investments in Government securities and corporate bond markets, he added.
There would not be any residual maturity criterion for the Government papers issued under the enhanced limit of $5 billion. This will make such bonds more tradable.
Fund managers think the hike in FII limits will have a positive impact on the rupee rather than on debt market itself. Mr Puneet Pal, Senior Vice-President and Fund Manager, UTI Mutual Fund, said, “The increase in limits for FII investment will offset the pressure on the rupee. The move will have a positive impact at the short end of the curve for Government securities and in the corporate bonds of one to two-year tenure.”
Asked when he expected these limits to get used up, Mr Pal said, “There is a good appetite for Indian paper. I would expect that this limit will get exhausted in about 3-4 months.”
ECBs
A senior Finance Ministry official said that Indian corporates were taking full advantage of the lower interest rate abroad. The result can be seen in the utilisation of limit for the External Commercial Borrowing (ECB).
However, people are avoiding foreign currency convertible bonds (FCCB).
Asked whether the Government will further raise the limit for ECBs, the official said, “Limit will never be a constraint.” The present limit is $30 billion.
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