RBI may review FPI limits in bonds periodically, set them in rupees

By: | Updated: August 5, 2015 1:11 AM

Currently, the FPI investment limit in Indian debt stands at $81 billion — $30 billion in government securities and $51 billion in corporate bonds.

The Reserve Bank of India on Tuesday said it is in talks with the government to review the foreign portfolio investment (FPI) limit in debt securities and to specify it in rupee terms. Currently, the FPI investment limit in Indian debt stands at $81 billion — $30 billion in government securities and $51 billion in corporate bonds.

At Tuesday’s monetary policy review, RBI governor Raghuram Rajan said the the central bank is talking to the government about a medium-term framework for FPI limit in debt securities.

He said the limits will be specified in rupees against the current practice of pegging it in dollar so that they do not vary with exchange rate moments. Using an example, Rajan said if the FPI investment limit is R2 lakh crore today, it could be R2.20 lakh crore tomorrow and that level will be independent of the rupee-dollar level.


The governor said the medium-term framework will also include a target indicating what fraction of the sovereign bond market will be constituted by FPIs in the medium term and an enhancement of staggered changes in limits every six months with this being released on a monthly or quarterly basis.

Data from the depositories show that FPIs have utilised 99.60% of their investment limit in government securities while, in corporate bonds, they have used up 76.60%.

“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 our more useful medium-term investors and, importantly, those coming through international central security depositories, such as Euroclear and Clearstream,” he added.

The governor said once the framework is decided, the central bank will wait for suitable market conditions, including greater certainty about Federal Reserve actions and appropriate liquidity conditions in Indian markets, before making a public announcement.

Over the last few months, the markets have been buzz with rumours about a possible hike in the FPI investment limits in debt, but nothing significant has materialised.

Ananth Narayan, regional head of financial markets, South Asia at Standard Chartered, says as a capital-starved country, India needs to ensure a diversified portfolio of inflows, across FDI, equity and debt.

“It is ironic that for a growing country like India, we have been far more liberal in allowing equity portfolio inflows, as opposed to debt inflows. At less than 4%, foreign ownership of our government bonds is far lower than other comparable nations,” Narayan said. Foreign investors have so far been net buyers of Indian debt at $6.38 billion in CY15. In July, FPIs were net sellers of Indian debt at $63.68 million.

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