RBI puts a break on Government Security debts

BE/RBI/23/2017

Indeed in a major move, Reserve Bank of India, on Monday squeezed the investment limit in Government bonds for Foreign Portfolio Investors with a restriction that 75% of the investment should go to long term investors and unutilized portion would not be made free for the general category.  What does this mean?

1. This will enable the foreign investors to have accessibility to the tune of 5 per cent on the Government bonds and 2 per cent on State Development Loans by March 31^st next year in a phased manner.
2. This enables the foreign investors to invest Rs. 2,420 crore in Government securities which was Rs. 2,310 crore before.
3. Also, the limit will be now Rs. 331 crore on State Development Loans, which was hiterhto Rs. 271 crore.
4. This will also end up in managing the macro prudential implications of evolving capital flows and help the long term investors ( Long term investors at present account for 20 per cent of FPIs in Government bonds)

This is said to be a sort of Capital control measure and is expected not to go well with the bond market.

Note:

At present, due to low yields on Government Bonds, FPIs have taken an interest in the Corporate bond segment and out of 51 billion dollar that FPIs are eligible to invest in corporate bonds, 92 per cent has been utilized.  However markets may not flutter, since investors have already utilized their limits.

From the concern area, if access to a secure instrument was curbed, portfolio investors would not risk it all for corporate paper and the market is likely to suffer.