The Reserve Bank of India has revised its rules for investments by foreign portfolio investors (FPIs) in the Indian bond market. RBI’s move is an attempt to invite fresh FPI investment and to hold on to existing investors in the local bond market. The rules include a reduction of residual maturity, withdrawal of the auction mechanism and revision of the cap on aggregate FPI investments in a single security.
Increased Investment Flexibility:
RBI stated that FPI investors could invest in any maturity they chose to. Earlier, there was a clause stating that the investment must be in a paper that had a minimum of three years left to mature.
According to the RBI notification , “The minimum residual maturity requirement for central government securities and state development loan categories stands withdrawn, subject to the condition that investment in securities with residual maturity below one year by an FPI under either category shall not exceed, at any point in time, 20% of the total investment of that FPI in that category.”
Apart from a reduction of residual maturity, the central bank has announced a withdrawal of the auction mechanism, wherein FPIs were required to purchase investment limits once the limit utilization breached 90% of the permitted quota. According to the RBI statement, “With Clearing Corporation of India Ltd (CCIL) commencing online monitoring of utilization of G-sec limits, it has been decided to discontinue the auction mechanism with effect from 1st June 2018. Utilization of FPI limits shall be monitored online thereafter.”
Another noteworthy step was the revision of the cap on aggregate FPI investments in a single security. Before this, the limits were auctioned once utilization reached 90% of the limit. The central bank has raised the cap on aggregate FPI investments in any gilt to 30% from 20%. Though RBI stated that there would be no auction for FPI limits, utilisation limits will be monitored online after 1st June 2018.
Auction Mechanism Scrapped :
One of the notable changes is the scrapping of the auction mechanism. Here FPIs were required to purchase investment limits once the limit utilization breached 90% of the permitted quota.
“With Clearing Corporation of India Ltd (CCIL) commencing online monitoring of utilization of G-sec limits, it has been decided to discontinue the auction mechanism with effect from June 1, 2018. Utilization of FPI limits shall be monitored online thereafter,” the RBI stated.
These steps announced by the RBI seem to have come well in time. April 2018 witnessed FPIs withdrawing a net sum of Rs 5,552cr from equities and another Rs 10,036cr from the debt market, taking the total to Rs 15,588cr (US$ 2.4bn). This outflow was triggered by more lucrative investment options owing to a surge in global crude prices and the rise in yields of government securities in the country. It is the greatest outflow from the capital market since December 2016 when FPIs withdrew over Rs 27,000cr. FPIs have invested over Rs 7,100cr in equities and withdrawn ~Rs 14,000cr from the debt market in 2018.
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