The cap on Foreign Institutional Investment in Government Securities (G Sec) could soon be raised. The current limit of $10 billion for the entire financial year has been almost exhausted.
If the limit is raised, more money will be available with the domestic financial institutions to lend to the corporate sector. This opens up the possibility of interest rates stabilising or even going down. There was fear that with the government's additional borrowing of Rs 52,872 crore during October-April 2011-12, the private sector would get crowded out of the market.
“We would soon look at it. We need more money. We first have to see if FII net inflow is good, then a decision could be taken,” a senior Finance Ministry official said. During January 1-October 17, the net FII investment (both equity and debt) dropped to $4,309.30 million from $33,726.10 million a year ago.
Commenting on the new thinking, the Senior Vice-President (Investments) ICICI Prudential Life Insurance Company, Mr Arun Srinivasan, said, “There has been a small rally today when yields were down about 6 basis points in benchmark paper on the speculation that the limits for FII investment in G-Secs will be raised.”
The market will keenly watch the amount by which the limit is raised. In case the limit is raised by more than $5 billion, it will definitely improve market sentiment, although it may not necessarily lead to any reversal in the interest rate direction, he added.
On the other hand, Mr T. B. Kapali, Vice-President (Economic Research), Shriram Group of Companies, said that FIIs mostly prefer to invest in government paper of one- to two-year maturity.
Given this preference, he wondered whether FIIs would use the proposed increase in limit — unless of course the Government decides to borrow through short-term paper. If that happens, he said, the FIIs may invest in such paper. Other domestic institutions, mutual funds and banks would then probably be free to invest in longer duration paper, he said.
Securities Transaction Tax
In another development, the Ministry indicated that investors and day traders in equity market may have to wait till next year's Budget for rationalisation of the Securities Transaction Tax (STT). Reduction in this tax will bring down the cost of buying or selling shares. STT accounts for nearly 51 per cent of total transaction cost of equity.
On Monday, the capital market division of the Ministry discussed the matter with the stock exchanges, the market regulator SEBI and the Department of Revenue.
“All options were discussed. We will come out with a fact-sheet on November 4 which will help in taking the final decision,” the official said.
Officials pointed out that when the Securities Transaction Tax on option trading was rationalised in 2008, volumes rose immediately to 200 per cent which later translated into 60 per cent growth on an annualised basis. He hoped that rationalisation of the STT for equity would do the same.