The debt market booster

On Thursday, the RBI further relaxed some of the investment rules for foreign institutional investors (FIIs) buying into domestic debt. Notifying the increase in the limits on government bond investments by $5 billion to $25 billion for FIIs, and by $5 billion to $50 billion across corporate bonds (measures announced by the government earlier in end-November), the central bank also announced the removal of a clause that had mandated first-time FIIs buying dated government securities to necessarily buy bonds with at least three-year residual maturity. This move will kick in alongside the hike in government debt limits, substantially assuaging buyers who will will be spared of any maturity restrictions on dated government securities. The RBI also removed the one-year lock-in period for the $22 billion investments in infra bonds.

Any easing of the FII investment norms in bonds could effectively help bring in more foreign exchange, coming at a time when the government is under immense pressure to contain the current account deficit, which touched an all-time high of 5.4 per cent in the July-September quarter.

There are enough indications that foreign pension funds and sovereign wealth funds are wanting to invest in the Indian debt market, which gives returns of over 8 per cent at a time when returns in other emerging markets are hovering at around 3-4 per cent. The rub-off is already visible. In 2012, FIIs were reported to have pumped in around Rs 35,000 crore in the Indian debt market, the highest in two years, with the robust inflows being attributed largely to the increase in the ceiling on both corporate and government bonds, coupled with the weakness in the Rupee against the US dollar. According to Sebi data, FIIs were gross buyers of debt worth Rs 2.06 lakh crore, while they sold bonds worth Rs 1.71 crore — a net inflow of Rs 34,988 crore or $6.65 billion. The higher inflows came despite the number of registered FIIs in India dipping to 1,759 last year from 1,767 at the end of 2011.

Easing rules in the debt market has been on the agenda of market regulator Sebi as well. In September, it offered a breather to foreign investors by allowing them to carry forward 50 per cent of their debt holdings to the next calendar year. Sebi also allowed FIIs to use the unutilised funds in corporate debt infra long-term bonds without obtaining its prior approval till the overall FII investments reaches 90 per cent of the limit.

A fillip to the debt markets could bolster the ongoing efforts at achieving a rebound in the India growth story. All of these steps, to that end, are entirely welcome.

Anil is a Senior Editor based in New Delhi.

anil.s@expressindia.com