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Last year, the central bank barred Foreign Portfolio Investors from purchasing short-term govt securities
“When we limited reinvestment in government securities below 3 years, we did not do the same thing for corporates because we wanted to develop a corporate bond market also. There has been some of that but there is again sitting too much at the short-end. We would like to nudge people into the longer-end. When you reinvest, you reinvest in three years and above securities,” said RBI governor Raghuram Rajan today.
In order to incentivise long term investors, RBI also enabled reinvestment of coupons in government bonds even when the existing limits are fully utilised. Allowing re-investment of coupons could effectively free up $2 billion for purchases of government bonds each year, Barclays estimated on Tuesday. It also implied India may not raise the current overall investment limit of $30 billion for overseas investments any time soon.
Last year RBI had barred Foreign Portfolio Investors (FPIs) from purchasing short-term government securities. The existing investments in treasury bills by FPIs was allowed to taper off on maturity or sale. FPIs were permitted to invest in government bonds with a minimum residual maturity of three years. However, no such condition was placed for corporate bonds.
“All future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years. Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years,” said RBI in the monetary policy statement today.
RBI also said that FPIs will not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes.
"RBI wanted to ensure that money inflow into the debt market is not just for the short term. They do not want FPIs investing merely for the interest rate differential. The real concern for the banking regulator is the strength of the currency. While several global currencies have weakened against the US dollar, rupee has not moved much," said Badrish Kulhalli, head of fixed income at HDFC Life.
RBI also introduced new bond futures with 5-7 year maturities, as well as 13-15 year maturities, complementing the current 10-year tenors unveiled last year.