The Reserve Bank on Tuesday raised limits for FPI investment in government securities (G-Sec) to 5 per cent of the outstanding stock by March 2018, a move that will bring in an additional Rs 1.2 lakh crore in G-Sec.
Announcing the fourth bi-monthly monetary policy for the current fiscal, RBI Governor Raghuram Rajan also said that the limits for FPI investment in debt securities will henceforth be announced/fixed in rupee terms.
The limits for FPI investment in the central government securities will be increased in phases to 5 per cent of the outstanding stock by March, 2018.
In aggregate terms, this is expected to open up room for additional investment of Rs 1,200 billion in the limit for central government securities by March, 2018 over and above the existing limit of Rs 1,535 billion for all government securities (G-Sec), Rajan said.
Setting out the new medium-term framework (MTF) for FPI (foreign portfolio investor) limits in debt securities, RBI said this is being done with the objective of having a more predictable regime for investment by FPIs.
Meeting a long pending demand of state governments, the RBI also said there will be a separate limit for investment by FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2 per cent of the outstanding stock by March, 2018.
This would amount to an additional limit of about Rs 50,000 crore by March, 2018.
Talking to reporters, Economic Affairs Secretary Shaktikanta Das said there is no formal limit but the current operating limit is about 3.8 per cent of the outstanding stock which will go up to 5 per cent of the outstanding stock by March, 2018.
He said roughly Rs 26,000 crore will flow into the G-Sec market in the current year 2015-16.
"We expect this would provide additional liquidity to the G-Sec market and this also should result in softening of the yields from the current rate which we are running," he said. On separate limit for investment by FPIs in SDLs, Das said it is for the first time that the RBI has also allowed FPI investment in state government securities.
"This is also something which goes in line with the principle of cooperative federalism which the government has been emphasising quite a lot... the state governments have also been demanding for quite a long time about FPI participation in the state government bonds," he said.
The Secretary added the move means roughly Rs 50,000 crore would flow into the state government securities by March, 2018 and about Rs 7,000 crore in the current year.