FIIs can buy $5bn more each of gilts, corp bonds

The finance ministry hiked the FII investment ceilings in government and corporate bonds by $5 billion each. FIIs can now invest up to $15 billion in government bonds and $20 billion in listed corporate bonds. The measure will help the government push through its bloated borrowing plan and hopefully lower interest costs.

Yields on the 10-year government benchmark bond fell 7 basis points to 8.81%, after hovering close to 9% for several days. Rising yields have forced the government to give higher coupons on new bonds, even as the RBI struggled to sell debt paper in a recent auctions.

For instance, the government recently offered a return of 8.79% on a new 10-year bond against the 7.8% it gave on a similar maturity bond some months ago, indicating a rise in borrowing costs of roughly 100 bps.

Thomas Mathew, joint secretary, capital markets, ministry of finance, said the measures should result in increased foreign participation in the Indian financial market.

Though bankers said the move will help cool yields, investors did not seem enthusiastic enough. Oriental Bank of Commerce CMD Nagesh Pydah said higher FII participation should result in lower yields and bring down the government’s borrowing cost.

Some industry experts, however, said currency and interest rate risk may dissuade FIIs from buying more bonds.

“We can expect some increase in FII

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