To discourage short-term and volatile dollar investments in Indian debt, the Reserve Bank of India (RBI) has reduced the investment limit for foreign investors into commercial papers by $1.5 billion to $2 billion.
The overall investment limit of $51 billion for foreign investors in corporate paper has been kept unchanged, the RBI said in a notification on Friday.
Commercial papers are short-term debt instruments with tenure of upto one year issued by companies to raise funds.
According to the central bank, the sub-limit of $3.5 billion available for foreign investors in commercial papers has been underused and is only 58% at present.
After pulling out a record $12 billion from the Indian bond market, foreign institutional investors turned net buyers since December and have invested over $2 billion. The big sell-off from FIIs between May and August 2013 had pushed up domestic bond yields by as much as 100 basis points and pummeled the rupee to an all-time low of 68.85/$. FIIs had continued to sell bonds even after August until November, keeping bonds and the rupee under pressure.
The RBI had attributed this big selling to short-term flows also termed as hot money. Indeed, FIIs had invested maximum in short-term treasury bills and commercial papers as these instruments offered high returns.
Data from the depositories show that as of Thursday, FIIs have exhausted 96% of their $5.5 billion investment limit in treasury bills against less than 75% of $14.5 billion in long-term bonds. Likewise, FIIs have used 58% of their limit in commercial papers but less than 30% in long-term corporate bonds.
