Foreign investment limit in government debt hiked by $5 billion

In a strong measure aimed at defending the rupee, the Centre has announced a hike in the foreign investment limits in government debt by $5 billion. The measure aims at reversing the outflow of FII funds from debt instruments, one of the reasons for the depreciation in the rupee in recent weeks.

Currently, the government debt limit stands at $25 billion, of which 75 per cent is estimated to have been used up so far. The SEBI, in a circular issued stated that the enhanced limit of $5 billion shall be available for investments only to those FIIs that are registered with the market regulator under the categories of sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks. 

These limits were last revised on September 23, 2012.

The higher limit comes in the backdrop of the rupee breaching the Rs 50/dollar mark, an expected spurt in the current account deficit, and a poor investor response to recent auctions of government debt. The rupee has slumped nearly 13.5% from its year-high in July due to a widening trade deficit that could worsen the current account deficit to over 3% of GDP, from 2.6% in 2010-11 fiscal. The decision to hike the FII limit in the government debt along with a central bank decision to buy back bonds worth $2 billion next week helped cool bond yields.

The most-traded 10-year bond yield was down 9 bps at 8.79%. The yield on ten-year benchmark paper had last week risen to a 39-month high of 8.94% in anticipation that the government will not be able to meet its fiscal deficit target and may have to raise more funds from the market to bridge the gap.

According to the experts It will serve multiple purposes, including broadening the investor base, increasing demand for gilts and improving foreign fund flows.

The debt flows have been strong in the current year, but portfolio investments have been weak because of the global risk aversion. Indian companies have borrowed nearly $21 billion overseas, but FIIs have invested only $2.2 billion in Indian equities and $8.7 billion in debt in the current fiscal. The government is now considering more measures to give a filip to capital flows that could include an increase in the $30 billion ceiling on overseas borrowing by companies. It has also put on fast track a proposal to allow individual foreign investors to invest directly into equities as part of the qualified foreign investor framework, or QFIF.