Now, foreign investors investing in portfolios need not worry as the Reserve Bank of India or RBI has revised its rules for foreign portfolio investors’ investments in Indian bonds. There is also reduction of residual maturity, withdrawal of the auction mechanism, and revision of the cap on aggregate Foreign Portfolio Investors (FPI) investments in a sole security.
These measures will increase foreign funds into Indian debt and cool off borrowing costs when yields are on an upward direction, having pared profits made in April. The minimal residual security needed by FPIs for investing in Central Government Securities and State Developmental Loans was terminated by the Central Bank. There is a condition that investment in securities having a residual maturity of less than a year has to be less than 20% of the total investment of the particular FPI in that category. FPIs were subject to invest in G-secs with a minimum residual maturity of three years till now.
For corporate bonds, an FPI can invest in papers having the minimum residual maturity of more than a year. This will possibly bring considerable foreign fund flows into the short tenor paper which is an attractive segment for investors from overseas.
The central bank has revised the cap on aggregate FPI in central government securities to 30% of the stock of that security from 20%.
The RBI said “With Clearing Corporation of India Ltd (CCIL) commencing online monitoring of utilization of G-sec limits, it has been decided to discontinue the auction mechanism with effect from June 1, 2018. Utilization of FPI limits shall be monitored online thereafter.”
In order to pay for those limits, FPIs had paid less, but then they don’t have to worry about participation in limit auctions to accrue limits despite their preference sometimes being to wait for essential economic data before making investment decisions.
The central bank has corresponded the all-in-cost ceiling for extrinsic commercials borrowings over benchmark rate. The all-in-cost ceiling fluctuated from 300 to 500 basis points for different maturities and different track classifications at an earlier time. Now, however, the central bank assigned an orderly ceiling of 450 basis points over the benchmark rate. The benchmark is a 6 month USB LIBOR (or relevant currency for particular currency) for Track I and Track II whilst it remains the rampant yield of the Government of India securities of the corresponding maturity for Track III (Rupee ECBs) and RDBs.
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