The Reserve Bank of India (RBI) on Friday raised the debt investment limits for foreign portfolio investors (FPIs) across all segments, including central government securities (G-secs), allowing cumulative increase of over Rs 1 lakh crore through FY19. Though the hike in limit for G-secs — 0.5% each year to 5.5% of the outstanding stock in FY19 and 6% of the stock in FY20 — was a bit lower than market expectations, analysts felt the move would help bring down the yields further at least in the short term. The RBI’s decision could also ease pressure on local banks to support the government’s borrowing programme and free up liquidity to support an incipient investment cycle. Currently, the FPI limit for general category G-sec investors stands at Rs 1.91 lakh crore; this has been raised to Rs 2.07 lakh crore for the first half of FY19 and further to Rs 2.23 lakh crore for H2FY19. For long-term FPI investors, the limit has been increased to Rs78,700 crore for the first half of FY19 and to Rs 92,300 crore for the second half of FY19. Aditi Nayar, principal economist, Icra, said though hike in the FPIs’ investment limit in G-secs would temporarily dampen bond yields further in the immediate term, “subsequently, the appetite of the FPIs for investing in Indian debt over the course of the year remains to be seen, given the expectation of continued monetary tightening by some global central banks”. There were speculations in the market that the FPI limit for G-secs might be increased gradually to 6-8% of the outstanding stock.
According to an Icra estimate, every 1 percentage point increase in the FPI investment limit in G-secs outstanding above 5% would result in an absolute increase of Rs 60,000 crore over the course of 2018-19. Coupon reinvestment by FPIs in G-secs, which was hitherto outside the investment limit, will now be reckoned within the G-sec limits. No fresh allocation has been made to the ‘long-term’ sub-category under state development loans (SDLs), the RBI said. Out of the existing limit of Rs 13,600 crore for this subcategory (SDLs), an amount of Rs 6,500 crore has been transferred to the G-secs category, the central bank notified. Further, the central bank has increased the proportion of limit hike for the general category investors in central government securities. The allocation ratio of the hike for general category investors and long term investors used to be in the ratio of 25:75 which has now been changed to 50:50 for fiscal 2019. As for corporate bonds, the FPI limits have been raised while removing the subcategories in the segment, in a move that could trigger more FPI flows into this segment. There would be a single limit for FPI investment in all types of corporate bonds, the central bank said, adding that the overall limit for FPI investment in corporate bonds will be fixed at 9% of outstanding stock of corporate bonds. The subcategories in corporate bonds · credit enhanced bonds, unlisted corporate debt securities and long-term investor category · have been receiving very limited foreign fund flows. Since a single limit has been introduced, more FPI money is believed to flow into the corporate bond segment going ahead. The central bank has hiked the limit for corporate bonds to Rs 2.66 lakh crore for the first half of the year and to Rs2.89 lakh crore for the second half of FY19 from the present limit of Rs2.44 lakh crore.