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In a move that could temporarily soften bond yields, the Reserve Bank of India, in consultation with the Government, on Friday hiked the foreign portfolio investors (FPI) investment limit in Central government securities (G-Sec) from 5 per cent of outstanding stock now to 5.5 per cent in FY2019 and 6 per cent in FY2020.
The hike comes in the wake of 99.31 per cent of the upper FII investment limit in G-Secs of ₹1,91,300 crore getting utilised. As per NSDL data, as on April 5, headroom for only ₹1,311 crore investment was available.
Aditi Nayar, Principal Economist, ICRA, said: “ While the hike in the FPIs’ investment limit is somewhat smaller than market expectations, it would temporarily dampen bond yields further in the immediate term.
“Subsequently, the appetite of the FPIs for investing in Indian debt over the course of the year remains to be seen, given the expectation of continued monetary tightening by some global central banks.”
In ICRA’s view, the 10-year G-sec yield is likely to trade in a range of 7.0-7.3 per cent in the remainder of April-June quarter of FY2019, before rising to 7.3-7.6 per cent in the July-September quarter of FY2019, as the outlook for the government’s fiscal trends, domestic inflation and FPI appetite for G-sec become clearer.
According to the RBI, coupon reinvestment by FPIs in G-secs, which was hitherto outside the investment limit, will now be reckoned within the G-sec limits.
“Since this is a new policy, as a one-time measure, the investment limit in the ‘General’ sub-category of G-secs has been increased by an amount equal to the stock of coupon reinvestment as on March 31, 2018. FPIs may, however, continue to reinvest coupons without any constraint, as they do now,” it said.
Based on an assessment of investment interest, the allocation of increase in G-sec limit over the two sub-categories – ‘General’ and ‘Long-term’ – has been re-set at 50:50 for the year 2018-19 from the current ratio of 25:75.
State loans
The FPI investment in state development loans (SDLs) has been left unchanged at 2 per cent of outstanding stock of securities.
The status quo on SDL investment limit comes probably on account of the fact that only 17.89 per cent of the upper FII investment limit in SDLs of ₹31,500 crore has been utilised.
No fresh allocation has been made to the ‘Long-term’ sub-category under SDLs. Out of the existing limit of ₹13,600 crore for this sub-category, an amount of ₹6,500 crore has been transferred to the G-secs category.
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