Foreign funds can now invest more in G-Sec

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RBI doubles investment limit for long-term investors to $10b

Foreign funds can now invest more in G-Sec
The Reserve Bank of India (RBI) on Wednesday doubled the limit of investments made by Sebi-registered long-term foreign investors in government securities to $10 billion.

The current limit for foreign institutional investors (FIIs), qualified foreign investors (QFIs) and long-term investors is a combined $30 billion. Of this, a sub-limit of $10 billion is now open to long-term investors, up from $5 billion so far.

RBI said in a notification that the decision, taken in consultation, would have immediate effect. Long-term foreign investors registered with Sebi are sovereign wealth funds, multilateral agencies, pension/ insurance/ endowment funds and the central banks of other countries.

What the decision means is that the limit for short-term investors stands reduced to $20 billion. Within this limit eligible investors may invest in treasury bills only up to $5.5 billion (Rs 25,416 crore), according to a separate statement issued by Sebi.

The Indian debt market has seen FII investments totaling $3.18 billion since January 1. The higher limit now set will help foreign long-term investors to invest more in debt paper.

Deven Choksey, MD of KR Choksey Securities, said foreign investors were drawn by the interest arbitrage that the bond market offers. “The government has to see that the rates offered are attractive and the rupee does not depreciate much. In 10 years the average rate of currency depreciation has been 4 per cent and even at a yield of 8-9 per cent, the investors make a profit of 5 per cent net of interest,” he said.

AK Prabhakar, independent analyst, also believes that RBI governor Raghuram Rajan’s reformatory moves will make the rupee-dollar parity stable and the impact will be visible after the general elections.

After the elections and capital flows into debt and equities will help the rupee appreciate to Rs 55 to the dollar by December.

Andrew Holland, CEO of Ambit Investment Advisors, believes the enhancement of the sub-limit is a good move. But it will not lead to an immediate movement of capital into India. “Investors will rather wait for inflation to come down. We will have to wait and see the impact.”

Sujan Hazra, economist with Anand Rathi Securities, says there is already some improvement in investments in government securities. “The RBI move is likely to help the overall environment since yields are expected to go down. If the rates are good it will provide an arbitrage opportunity to the investors in the short term as well as long term. Government debt paper is currently rated between 8.7 to 8.8 per cent.”

Foreign funds have lately started to move back into debt after six months of steady outflows. “Partly a product of seasonality, these flows may also stem from the relatively stable exchange rate and expectations that the status quo in policy rates will continue because of lower inflation,” said Nomura’s Sonal Varma in a note.

She said the inflows should help finance the current account deficit in the near term. “However, if inflation does not moderate much, it could also prompt the return of higher interest rate expectations, which would increase the risk of net outflows returning,” she added.

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