Finmin looks if caps on FIIs in Rupee bonds can go

The finance ministry has asked the National Institute of Public Finance & Policy (NIPFP) to analyse whether the government can remove the limits — also known as quantitative restrictions — currently imposed on FII investment in rupee-denominated debt.

Some policymakers opine that the government can remove quantitative restrictions by rescinding the limit on FII investment in debt. There is also a proposal to replace caps with percentage limits in the debt market. The NIPFP has been directed to prepare a discussion paper on the subject by the department of economic affairs in the finance ministry.

The government has been raising the limit on FII investment in G-Secs and the corporate bond market to attract capital inflows. Recently, the ceiling on FII investment in government debt has been increased by $5 billion to $20 billion, while the residual maturity required for investments in excess of $10 billion has been reduced from 5 to 3 years. FIIs are allowed to investment another $20 billion in corporate bonds and $25 billion in infrastructure bonds in a year. Any move to remove the cap altogether would open up the country's capital account but is likely to be resisted by the Reserve Bank of India.

Giving free hand to foreign investment in debt market could create excessive volatility in the bond market, affecting yields and complicating the monetary policy. At the same time, such a policy could result in FIIs building large trading desks

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