New FPI investment policy in G-Secs will stimulate foreign investment inflows

The RBI has introduced a modified FPI policy in the government securities (G-Sec) market. It is expected that the move will enhance greater participation of FPIs and thus increasing the inflow of foreign capital.

The unique feature of the new FPI policy is that it increases the investment limit by foreign investors in phases.

As per the new policy, FPIs will be allowed to invest up to five percent of the total Government securities available in the market.

FPI investment in government debt securities would be pegged or tied to rupee against the current practice of linking it to the dollar. This means that the investment limit foreign investors will be expressed as Rs crore investment in total G Securities available in the market.

          “Limits will be specified in rupees so that they do not vary with exchange rate movements,” Dr. Rajan has elaborated the move for setting rupee limit for FPI investment.

Currently, FPI limit in G Secs is defined in terms of US Dolalr billion. According to the existing policy, FPIs can purchase upto $30 billion worth of government bonds and an additional $20 in other debt instruments.

RBI said it has been decided to raise the limit for FPI investment in Government Securities in two phases in the current fiscal. First, from October 12, 2015 and the second from January 1, 2016. The limit will be increased from ₹1.53 lakh crore to ₹1.7 lakh crore from October 12 and ₹1.86 lakh crore from January 1.

Another objective of the new policy is to discourage FPI is to make shorter investment in G Secs. Already, they can purchase only those instruments that have a residual maturity of at least one year.

“The overall goal of this medium-term framework will be to enlist FPIs in market development within prudential limits which we set even as they are attracted by the rates available in domestic bonds,” Dr. Rajan explained the rational of the new policy. His words indicate that the value government securities available for foreign investors should be clear to the FPIs.

 “ The framework would create space for participation of different kinds of investors which included long-term investors such as pension funds and sovereign wealth funds, as well as more usual medium investors and importantly those coming through international central security depositories such as Euroclear and Clearstream,” – the RBI Governor has substantiated the usefulness of the new policy.

The new policy has been designed after consulting with the Ministry of Finance.