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In keeping with their promise to improve market conditions, the Finance Ministry and the RBI on Monday increased the amount of rupee-denominated debt that foreign investors can own in the Indian market.
The slew of measures announced today could lead to greater capital flows on the debt side and also help arrest the slide in rupee, which has lost over 21 per cent against the dollar over the last one year, official sources said.
The latest policy steps, however, did not impress the stock market. The benchmark Sensex dipped as no announcements came on big-ticket reforms such as a roadmap for partial decontrol of diesel prices or allowing foreign supermarket chains to set up business in India.
Under today’s policy package, the overall FII investment ceiling in government securities (G-Secs) has been hiked to $20 billion from $15 billion earlier.
Policymakers have also rolled out a new external commercial borrowing (ECB) scheme for manufacturer exporters and companies in the infrastructure sector that have been a consistent foreign exchange earner.
This ECB scheme will have an investment ceiling of $10 billion, in addition to the overall indicative ECB ceiling of $30 billion. Companies in the manufacturing and infrastructure sectors can avail themselves ECBs for repayment of rupee loans taken from the domestic banking system and/or for fresh rupee capital expenditure.
The maximum permissible ECB that can be utilised by an individual company will be limited to 50 per cent of the average annual export earnings realised in the past three financial years
“We are looking at companies that have large potential for exports to access funds cheaper so that we have greater inflows and investment rates. That is why this new ECB scheme has been devised,” a senior Finance Ministry official explained.
G-Secs
On the G-Secs front, an additional window of $5 billion will be available for FIIs subject to a residual maturity of three years.
Hitherto, FIIs could invest up to $15 billion in G-Secs — $10 billion irrespective of the maturity and $5 billion with residual maturity of five years. The five-year residual maturity has been modified to three years. Simply put, FIIs get a total limit of $10 billion up to residual maturity of three years. The Finance Ministry has now allowed sovereign wealth funds, multilateral agencies, insurance, pension funds, endowment funds and foreign central banks to invest in G-Secs within the enhanced limit of $20 billion. The only rider is all such investors have to be registered with SEBI.
The Finance Ministry admits that policy measures would largely encourage flows to the debt side.
“So far this year, we have got great inflows on equity segment. This (today’s steps) will also encourage flows to the debt segment so that we give opportunity to corporates to access cheaper funds”, a Finance Ministry official said.
Up to June 18 this calendar year, FII investment in equities have been about $8.6 billion, while debt-related inflows have been about $3.925 billion. For calendar 2011, FII net investment was $-357 million and debt inflow was $8.654 billion.
Infra bonds
Of the overall FII investment ceiling of $25 billion in long-term infrastructure bonds, the Finance Ministry has now reduced the residual maturity to 15 months and lock-in to one year completely for investments of $12 billion.
The lock-in for FII investments in IDF has been brought down to one year from three years and residual maturity has now been pegged at 15 months.
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