- RBI reviews rule for foreign investors in government bond markets
- 75% of any future increase in limit to be allocated to long term investors
- 25% of any future increase in limit to be put in general category
- Earlier 60% of any limit increase was reserved for long term investors
- Unused limits for long term investors will no longer be transferred to general category
The Reserve Bank of India has adjusted rules for foreign portfolio investments in government securities, titling the scales further in favour of long-term investors.
In a notification issued on Monday, the central bank said that a greater proportion of increased foreign investment limits would be reserved for so-called long-term investors, including sovereign funds, insurance and pension funds. Starting July, 75 percent of any increase in the foreign investment limit would be allocated to long term investors, while the remaining would be allocated to general category investors. Earlier 60 percent of any increased limit used to reserved for long term investors.
The RBI reviews the foreign investment limit in government bonds every quarter with the objective of allowing overseas investors to hold upto 5 percent of outstanding central government securities by March 2018. In the case of state development loans (or state government bonds), the objective is to allow foreign investors to hold upto 2 percent of outstanding securities by March 2018. This objective remains unchanged, said the central bank in its notification.
However, noting that long term investments have remained thin, the RBI said that there is a need to try and recalibrate flows.
"Currently ‘long term' category of FPI (foreign portfolio investors) accounts for about 20 percent of the total investment by FPIs in Central Government securities. In order to recalibrate the framework to meet the objective of a preference for long-term investors and also with a view to manage the macro-prudential implications of evolving capital flows, the medium term framework has been reviewed," said the RBI in its notification.
The change in rules comes at a time when foreign inflows into the debt markets have been strong. Data from the National Securities Depository Ltd shows that FPIs have invested nearly Rs 95,000 crore in Indian debt so far this calendar year. Since a large part of these flows appear to have come from general category investors, the RBI's revised rules are likely to slow down inflows. A significant part of the flows, in recent months, have also been directed towards corporate debt. In this category, the RBI has not made any changes to its rules.
Other safeguards such as investments being restricted to securities with a three-year minimum residual maturity will remain in place.
“Given that globally we are moving towards rate normalisation, the RBI is showing a preference towards more stable flows,” Soumyajit Niyogi, associate director at India Ratings & Research told BloombergQuint. "Yields have fallen quite a bit and the currency has appreciated considerably this year, so the sensitivity to foreign flows is high."
(Corrects an earlier version which said RBI reviews the foreign investment limit in government bonds every six months, instead of every quarter.)
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