In a bid to attract foreign exchange, the Reserve Bank of India (RBI) has notified enhancement in the debt investment limit for foreign institutional investors (FIIs) and long-term investors from $65 billion to $75 billion.
The RBI has done away the condition whereby FIIs and long-term investors were required to invest in government securities (G-Secs) of three years residual maturity at the time of first purchase.
The central bank has also dispensed/reduced the residual maturity requirements for investment in corporate bonds.
The enhancement in debt investment limits for FIIs and long-term investors comes in the backdrop of the country’s deteriorating external position.
Current Account Deficit (CAD) rose to $22.3 billion (5.4 per cent of GDP) in July-October 2012 from $18.9 billion (4.2 per cent of GDP) in the year-ago period.
CAD arises when a country’s total imports of goods, services and transfers are greater than exports.
Government Securities
The enhanced investment sub-limit for investment by FIIs and long-term investors in G-Secs has been set at $15 billion (up from $10 billion earlier). However, these entities cannot invest in short-term papers such as Treasury Bills under this sub-limit.
Besides this sub-limit, FIIs have a separate sub-limit for investing up to $10 billion in government securities without any conditions and the same has been left unchanged.
Sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks registered with the markets regulator are classified as long-term investors. The total limit for investment in government securities by FIIs and long-term investors now stands enhanced to $25 billion (FIIs and long-term investors put together: $15 billion; and FIIs separately: $10 billion).
Corporate debt
The investment limit by FIIs in corporate debt in other than infrastructure sector has been enhanced to $25 billion from $20 billion. The RBI has also included investment by long-term investors within this enhanced investment limit.
The new limit in corporate debt in other than infrastructure sector will not be available for investment in certificate of deposits and commercial paper.
Following the enhancement in the abovementioned investment limit, the total corporate debt investment limit for FIIs and long-term investors has been upped from $45 billion to $50 billion ($25 billion each for infrastructure and other than infrastructure sector bonds).
Lock-in period
Within the overall limit of $25 billion for foreign investment in infrastructure corporate bonds, the central bank has decided to dispense with the one-year lock-in condition for the limit of $22 billion, including $10 billion for non-resident investment in infrastructure debt funds. Further, the five years residual maturity requirement for investment by qualified foreign investors (QFIs) for the balance $3 billion investment has been lowered to three years.
According to Jyoti Rai, Senior Vice-President, SBI SG Global Securities Services, “Amongst our target segment we are popularising merits of investing in India’s debt market. In our experience, FIIs were finding investment into debt complicated as it included different categories and various restrictions.
“Now with the removal of lock-ins in infrastructure bonds and residual maturity in government debt for the foreign investors it will add to ease of operations as well.”
QFI, MF
QFIs and mutual funds will continue to have a separate investment limit of $1 billion for investing in corporate debt securities over and above the revised limit of $50 billion for investment in corporate debt.