In a bid to attract more long-term foreign investment to the Indian bond market, the RBI on Tuesday allowed reinvestment of coupons of government bonds and said that any incremental purchases of corporate debt must be into bonds having residual maturity of minimum three years.
Further, foreign institutional investors cannot invest incrementally in short-maturity liquid and money market mutual fund schemes, the RBI said.
Governor Raghuram Rajan pointed out that much of the foreign investment in corporate bonds is at the shorter end. “We would like to nudge people at the longer end; so, now, we have said reinvest in the longer securities,” he said at a press meet after the release of the sixth bi-monthly policy statement on Tuesday.
With investment limits of $30 billion in government bonds exhausted, foreign institutional investors have been increasing investments in corporate bonds since September. In January this year, FIIs bought corporate bonds worth $3.7 billion. The investment limit in corporate bonds is $51 billion currently, which includes investments in mutual fund schemes.
Bankers said while this may reduce the dollar inflow into corporate bonds immediately, FIIs keen on exposure to Indian debt due to better returns will eventually buy long-term corporate paper. “We could see some fall off in inflows but it will not make a big difference,” said a bond trader with a foreign bank.
The RBI also provided greater flexibility to FIIs in the exchange-traded currency derivatives market by allowing both domestic and foreign players to take positions of up to $15 million per exchange without any underlying exposure. So far, investors were allowed to take derivatives positions only if they had underlying exposure.
Investors can also take positions in other currency pairs such as euro/rupee, pound/rupee and yen/rupee for up to $5 million over and above the $15 million in dollar/rupee futures and options.