The central bank Thursday eased rules for foreign portfolio investors (FPI) to buy local corporate bonds by lifting caps on short-term debt investment limits at a time rate differentials between India and the US are at the narrowest in recent memory.
“On a review, and with a view to providing greater ease of investment to FPIs, it has been decided to withdraw the requirement for investments by FPIs in corporate debt securities to comply with the short-term investment limit and the concentration limit,” the Reserve Bank of India (RBI) said.
The revised rules, effective immediately, are aimed at boosting FPI investments in corporate bonds. Latest NSDL data showed that FPIs utilised only 14.5% of the available investment limit as on May 7. The proportion was 15.7% a year ago.
“Easing of these rules will give FPIs flexibility on how much to invest and in which debt securities without having to worry about breaching regulatory caps,” said Meeta Kurpad, Partner, Cyril Amarchand Mangaldas. “This gives them the opportunity to construct their portfolios and exit plans."
Before easing of these rules, investments by FPIs in corporate bonds with residual maturity of up to one year was capped at 30% of the total investment of FPIs in corporate bonds. These limits were applied on the end-of-day basis.
Similarly, investments in corporate debt securities by an FPI (including its related FPIs) was capped at 15% of prevailing investment limit for long-term FPIs and 10% for others.
"The relaxation is for the general route,” Kurpad said. “The caps in any event didn’t apply to investments in the voluntary retention route (VRR), which has more investment flexibility.”
Long-Term Commitments
According to bond market participants, rules restricting FPI investment in short-term debt instruments need to be seen in the context of the central bank’s preferred nature of encouraging long-term flows as short-term flows could potentially impact rates and liquidity.
“The easing of rules seems to be more of an enabling factor because there are investors who don’t want to take a long-term credit risk,” said Soumyajit Niyogi, director at India Ratings. “However, it is important to remember that inflows in corporate bonds, where there is significant credit risk compared with sovereign debt, ultimately depend on interest rate differentials between India and the US. Currently, the differential is the lowest in recent times.”
In April, the central bank reviewed the limits on FPI investment in government as well as corporate bonds. The RBI maintained the existing cap of 15% for corporate bonds for the current financial year.
Accordingly, the upper limit for foreign investments in corporate bonds was set at Rs8.2 lakh crore for the first half and Rs8.8 lakh crore for the second half.
“On a review, and with a view to providing greater ease of investment to FPIs, it has been decided to withdraw the requirement for investments by FPIs in corporate debt securities to comply with the short-term investment limit and the concentration limit,” the Reserve Bank of India (RBI) said.
The revised rules, effective immediately, are aimed at boosting FPI investments in corporate bonds. Latest NSDL data showed that FPIs utilised only 14.5% of the available investment limit as on May 7. The proportion was 15.7% a year ago.
“Easing of these rules will give FPIs flexibility on how much to invest and in which debt securities without having to worry about breaching regulatory caps,” said Meeta Kurpad, Partner, Cyril Amarchand Mangaldas. “This gives them the opportunity to construct their portfolios and exit plans."
Before easing of these rules, investments by FPIs in corporate bonds with residual maturity of up to one year was capped at 30% of the total investment of FPIs in corporate bonds. These limits were applied on the end-of-day basis.
Similarly, investments in corporate debt securities by an FPI (including its related FPIs) was capped at 15% of prevailing investment limit for long-term FPIs and 10% for others.
"The relaxation is for the general route,” Kurpad said. “The caps in any event didn’t apply to investments in the voluntary retention route (VRR), which has more investment flexibility.”
Long-Term Commitments
According to bond market participants, rules restricting FPI investment in short-term debt instruments need to be seen in the context of the central bank’s preferred nature of encouraging long-term flows as short-term flows could potentially impact rates and liquidity.
“The easing of rules seems to be more of an enabling factor because there are investors who don’t want to take a long-term credit risk,” said Soumyajit Niyogi, director at India Ratings. “However, it is important to remember that inflows in corporate bonds, where there is significant credit risk compared with sovereign debt, ultimately depend on interest rate differentials between India and the US. Currently, the differential is the lowest in recent times.”
In April, the central bank reviewed the limits on FPI investment in government as well as corporate bonds. The RBI maintained the existing cap of 15% for corporate bonds for the current financial year.
Accordingly, the upper limit for foreign investments in corporate bonds was set at Rs8.2 lakh crore for the first half and Rs8.8 lakh crore for the second half.
You may also like
Morning news wrap: India targets Pakistani Air Bases; people wake up to sirens in J&K
PIB debunks fake claim that Pakistani forces destroyed India's S-400 defence system
Indian armed forces destroy Pakistani posts, launch pads; intercept multiple Pakistani drones
Will the CID Team Be Disbanded? An Audio Clip of ACP Pradyuman Creates a Sensation
Pakistan claims India targeted three airbases with missiles, drones
