The Reserve Bank of India is talking to the Government about a medium term framework for foreign portfolio investor (FPI) limits in debt securities to create space for participation for different kinds of investors so that the bond market can be developed further.
According to RBI Governor Raghuram Rajan, the framework will include a target for what fraction of the sovereign bond market will be constituted by FPIs in the medium term and an announcement of staggered changes in limits every six months, with these being released on a monthly or quarterly basis (the RBI has to determine that yet).
The Governor elaborated that the FPI investment limits will be specified in rupees so that they do not vary with exchange rate movements.
The framework will create space for participation of different kinds of investors, which include long-term investors such as pension funds and sovereign wealth funds as well as the more usual medium term investors and importantly those coming through international central security depositories such as EuroClear and Clearstream.
"The overall goal of this medium term framework will be to enlist FPIs in market development within prudential limits that we set even as they are attracted by the rates available in Indian bonds.
"Once the framework is decided, we will wait for suitable market conditions including possibly greater certainty about Federal Reserve actions and appropriate liquidity conditions in Indian markets before making a public announcement," Rajan said.
Currently, the debt investment limit available to FPIs is capped at $81 billion (government debt: $30 billion and corporate debt: $51 billion).