The government can easily increase the limits of foreign institutional investors (FIIs) in government securities (G-Secs) by $5-$30 billion to shore up its foreign exchange reserves, a report has said.
According to the Bank of America-Merrill Lynch (BofA-ML) report, increase in limits of FIIs in G-Secs will help to raise the foreign exchange reserves to guard against effects of global currency market volatility.
"In case of outflows, India will be no worse off if the RBI (Reserve Bank of India) buys the FX (foreign exchange) during inflows," the report said.
Secondly, FII inflows into government securities are easier to attract as RBI rate cycle is peaking. And the interest in corporate debt will take time as concerns about corporate stress remain, says the BofA-ML report.
According to the report, the corporate debt market is still not very liquid, especially in comparison to the G-Sec market, as it is dominated by long-hold investors, like insurers.
Further, it is not realistic to expect that debt FIIs can be pushed into corporate debt to get India debt exposure if the G-Sec quota is filled up.
According to the report, higher FII inflows into G-Secs should help to bring down the lending rates following the RBI's 100 basis points cut in the statutory liquidity ratio.
BofA-ML said the government can also do away with separate limits for sovereign wealth funds (SWF) within the overall $81 billion foreign institutional investors' (FIIs) debt limits.
The separate SWF limits are not being utilised as many of them invest in the Indian paper through FIIs.
BofA-ML said the foreign investors have utilised 97.4 per cent of their $25 billion limit following the $2.6 billion inflow on Wednesday.