RBI restricts G-sec debt portfolio flows
In a major move that may induce some volatility in the bond market this week, the Reserve Bank of India (RBI) on Monday tweaked the government bond investment limit for foreign portfolio investors, stating that 75 per cent of the investment amount should go to long-term investors, and what is unutilised would not be freed up for the general category. The plan is to allow foreign investors access to 5 per cent of the government bonds and 2 per cent of the state development loans by March 31 next year, in phases.
In a major move that may induce some volatility in the bond market this week, the Reserve Bank of India (RBI) on Monday tweaked the government bond investment limit for foreign portfolio investors (FPI), stating that 75 per cent of the investment amount should go to long-term investors, and what is unutilised would not be freed up for the general category.
The plan is to allow foreign investors access to 5 per cent of the government bonds and 2 per cent of the state development loans by March 31 next year, in phases.
As part of that measure, the central bank increased the limit for FPI play in government bonds, applicable from July 4. Now foreign investors can invest ~2,420 crore in government securities, against ~2,310 crore earlier. In the case of state development loans, the limit has been revised to ~331 crore from ~271 crore earlier.
The central bank said it was doing this to meet the “objective of a preference for long-term investors and also with a view to manage the macro-prudential implications of evolving capital flows”.
At present, long-term investors account for 20 per cent of the investment by FPIs in government bonds.
“This is a kind of capital control measure. This may not be good for the bond market in the long run,” said a senior bond trader with a foreign bank.
Currently owing to low yields in government bonds, FPIs have taken an interest in the corporate bond segment. Of the rupee-equivalent of $51 billion that FPIs can invest in corporate bonds, 92 per cent has been exhausted. In government bonds, investors have taken 95.7 per cent of the amount allotted. However, as investors come close to their limits, the pace of buying in government bonds has also come off substantially. So in that way there won’t be much of a flutter by the move in the markets.
“Considering the government bond market is deep enough and have lots of investors, the central bank is channelising the flows to the corporate bond market. FPIs themselves prefer to invest in corporate bonds as the yield pickup is good and the secondary market liquidity has improved substantially,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.
According to Soumyajit Niyogi, associate director at India Ratings and Research, the move might have been taken considering the normalisation of global quantitative easing measures.
“Ahead of further normalisation of the global interest rate scenario, the RBI is ensuring a more stable flow of money in the market, rather than hot money flows,” said Niyogi.
Besides, said Krishnamurthy, space has been created for these investors to invest in newer kinds of instruments such as bonds issued by infrastructure investment trusts (InvITs) and real estate investment trusts (REIT).
However, the senior bond trader quoted above said that if access to a secure instrument was restricted, portfolio investors would not risk it all for corporate paper and the market could suffer eventually.
The plan is to allow foreign investors access to 5 per cent of the govt bonds and 2 per cent of the state development loans by March 31 next year, in phases