Debt to get the FII touch
After holding out for long in terms of relatively conservative limits on investment by foreign institutional investors (FIIs) in the local debt markets, RBI has now raised the investment ceiling for them.
By Team ET, TNN |
India’s moribund debt markets may see more foreign portfolio investors at play. After holding out for long in terms of relatively conservative limits on investment by foreign institutional investors (FIIs) in the local debt markets, RBI has now raised the investment ceiling for them.
RBI now proposes to permit FIIs to invest in the Central and state government securities, by an incremental amount of 5% of total net issuance in the previous financial year.
This would be reckoned over and above the current stipulation of FII investment up to $2bn in the debt market. The central bank has said that the existing limit would be enhanced in phases to $2.6bn by December and further to $3.2bn by March ’07. Yet, the extant limit of $1.5bn for investment in corporate debt would continue to be in vogue.
Ajay Mahajan, group president, financial markets and institutions YES Bank, said, “FIIs enter the debt market only if the yield on instruments like treasury bills and bonds exceed the swap cost of the overseas currencies. As of now, the arbitrage is actually negative as the cost of forex borrowings is higher than investment yields.”
FIIs can now rebook a part of their cancelled forward contracts. This proposal may not have any major positive implications for FIIs, yet it may improve sentiment and the appetite for debt market instruments among FIIs.
ADVERTISEMENT
RBI on Tuesday had said that it would allow FIIs to partially rebook their cancelled forward contracts, provided these are supported by underlying exposures. The modalities would be finalised in consultation with market participants. FIIs which are active in the domestic equity market do not hedge their foreign exchange risk. Those present in the local debt markets seldom call for cancellation of their contracts, a treasury official said.Currently, FIIs are allowed to hedge the market value of their entire investment in equity and/or debt within India as on a particular date. However, once these forward contracts are cancelled, they cannot be rebooked, but can be rolled over on or prior to the date of maturity.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
