The Reserve Bank of India (RBI) on Tuesday increased the foreign investment limits in central government securities and allowed overseas portfolio investors to buy state government debt.
In its bi-monthly monetary policy statement, the RBI announced a medium-term framework to set limits for investment by foreign portfolio investors (FPIs) in government debt. FPI limits will now be fixed in rupee terms, it said.
The central bank said that the FPI limit in central government securities will be increased in phases to 5 per cent of the outstanding stock by March 2018. This will allow FPIs to invest Rs 1,20,000 crore in central government securities, over and above the existing limit of Rs 1,53,500 crore for all government securities.
A PTI report quoted Economic Affairs Secretary Shaktikanta Das as saying that the current operating limit for FPI investment in central government debt is about 3.8 per cent of the outstanding stock, though there is no formal cap.
The limits will be reviewed twice a year, in March and September. Limits for the residual period of the current financial year will be increased in two tranches from October 12, 2015, and January 1, 2016. Each tranche entails an increase of Rs 13,000 crore for central government securities, comprising Rs 7,500 crore for long-term investors and Rs 5,500 crore for others.
The RBI also announced a separate limit for investment by FPIs in State Development Loans. SDLs constitute debt state governments issue to fund their fiscal deficits.
The RBI said investment in SDLs will be increased in phases to reach 2 per cent of the outstanding stock by March 2018. This amounts to about Rs 50,000 crore. The RBI fixed a Rs 3,500 crore limit each for FPI investment in SDLs to be opened up in October and January 2016.
The central bank also maintained the cap of minimum residual maturity of three years for investments in government securities.
While opening up of the bond market makes India more connected to the global financial system, critics say that restrictions on investments in government securities have helped the country contain the impact of global financial crises and that the recent move could make it more vulnerable to volatility in the capital markets.