The Reserve Bank of India (RBI) on Thursday raised the investment limit for foreign institutional investors (FIIs) in the bond market by $10 billion to $75 billion, raising the caps for government and corporate bonds by $5 billion each. Accordingly, the total investment limit available to FIIs in government bonds will be $25 billion and in corporate bonds, including infrastructure bonds, will be $50 billion.
In government bonds, the enhanced limit has been added to the sub-limit of $10 billion, where FIIs are allowed to invest only in long-term government bonds with a residual maturity of at least three years. However, this has now been liberalised to a residual maturity of at least one year.
The enhancement of $5 billion in corporate bonds will not be available to buy certificates of deposit or commercial papers, the RBI said.
The investment sub-limit for infrastructure bonds has been kept unchanged but the restriction of the lock-in period for 1 year has been removed. FIIs will have to continue to invest in infrastructure bonds with a residual maturity of 15 months and above, the central bank said.
“The three-year residual maturity requirement for investments by qualified financial investors within the $3 billion limit has been modified to three years’ original maturity,” the RBI said.
Incremental inflows by FIIs into Indian debt so far this month has been negligible even though FIIs had bid aggressively at the auction of limits. Provisional data from the Securities and Exchange Board of India show FIIs invested only $200 million in bonds so far in January. Since April, they have invested $2.8 billion in debt.
FIIs lapped up $3.5 billion worth of debt limits at the auction last week and paid high premiums as well. The auction saw bids worth a little over $4 billion.
“Globally, there is an overall dollar liquidity overhang. Of late, the outlook for India has improved significantly,” said P Mukherjee, head of treasury at Axis Bank, explaining the rising FII interest in Indian bonds.
Bankers said the recent fall in bond yields on the back of expectations of interest rate cuts has also triggered a spurt of FII buying.
With tenure restrictions removed, buying in government bonds by FIIs is expected to increase. FIIs have already exhausted their investment limits in government bonds and SEBI didn’t have free limits to auction this month. The enhanced limit of $5 billion will also be quickly lapped up at higher premiums, bankers said.