FPI investment limit hike of 0.5% by RBI is below expectations, but will help lower bond yields

Reserve Bank of India has raised the investment limit for foreign portfolio investors (FPI) in Central government securities by 0.5 percent to 5.5 percent of outstanding stock of securities in 2018-19 and 6 percent of outstanding stock of securities in 2019-20.

Market experts said that an increase is necessary to make up for a reduction in demand from domestic banks.

Karthik Srinivasan, Senior Vice President of ICRA said, “The hike is lower than the market had expected but this will increase some more appetite by foreign investors to buy G-secs and hence help lower bond yields, maybe by 4-5 basis points.”

On Friday, the 10-year government securities or government bonds saw yields ending trade at 7.17 percent.

The new limits will be applicable with immediate effect, the central bank said.

In a report dated March 15, research firm Nomura said that a 1 percent increase in the FPI cap, from 5 to 6 percent would increase the limit by Rs 80,000 crore in absolute terms.

In 2017-18, the total FPI investments in G-secs and corporate bonds stood at Rs 144,682  crore, substantially higher from the Rs 48,411 crore of 2016-17.

Srinivasan believes that the FPI inflows could be lower than the previous financial years as firstly, the limits are already full and this hike is nominal. Secondly, global interest rates are rising, so even if the US Fed hikes rates twice, the difference between G-Secs and US rates come down and investors might not want to take currency risks, so the views by foreign investors could change.

In the bimonthly monetary policy statement of October 2017, RBI had proposed that a detailed review of current regulations on debt investment by FPI shall be undertaken to facilitate the process of investment and hedging by FPIs.

A separate notification will be issued announcing coupon reinvestment arrangements referred to in paragraph 3 (G) and other changes affecting operational aspects of FPI investments in debt, in consultation with SEBI, the banking regulator said.

Other Revisions

 

    1. The limit for FPI investment in State Development Loans (SDLs) would remain unchanged at 2 percent of outstanding stock of securities.

 

    1. The overall limit for FPI investment in corporate bonds will be fixed at 9 percent of outstanding stock of corporate bonds. All the existing sub-categories under the category of corporate bonds will be discontinued and there would be a single limit for FPI investment in all types of corporate bonds.

 

    1. No fresh allocation has been made to the ‘Long-term’ sub-category under SDLs. Out of the existing limit of Rs 13,600 crore for this sub-category, an amount of Rs 6,500 crore has been transferred to the G-secs category.Both the above decisions can give some filip to the corporate bonds and improve flexibility to utilise the sub-limits to invest more.

 

    1. The allocation of increase in G-sec limit over the two sub-categories – ‘General’ and ‘Long-term’ – remains at the current ratio of 25:75. However, based on an assessment of investment interest, this ratio has been re-set at 50:50 for the year 2018-19.This move to reduce the limit for long-term investors will increase appetite for investment by small players and traders.

 

    1. Coupon reinvestment by FPIs in G-secs, which was hitherto outside the investment limit, will now be reckoned within the G-sec limits. FPIs may, however, continue to reinvest coupons without any constraint, as they do now.Only at the time of periodic re-setting of limits, coupon investments would be added to the amount of utilization. Accordingly, for the year 2018-19, the stock of coupon investment of Rs 4,760 crore as on March 31, 2018, would be added to the actual utilization under the ‘General’ sub-category of G-secs. Since this is a new policy, as a one-time measure, the investment limit in the ‘General’ sub-category of G-secs has been increased by an amount equal to the stock of coupon reinvestment as on March 31, 2018.

 

  1. This coupon reinvestment arrangement will be extended to other debt categories subsequently.moneycontrol