RBI panel for increasing investment limit for FIIs in government securities

MUMBAI: An RBI working group has suggested that investment limit for foreign institutional investors ( FIIs) in government securities should be increased gradually.

"Investment limit for FIIs in G-Sec may be increased in gradual steps. The increase in the investment limit can be reviewed on a yearly basis, keeping in view, the country's overall external debt position, current account deficit, size of government borrowing programme," the report said.

The investment limit for FIIs in G-Sec is at present capped at $ 15 billion.

RBI's 'Working Group on Enhancing Liquidity in Government Securities and Interest Rate Derivatives Markets' suggested that issue of withholding tax on FIIs should be reviewed as it has been cited as a major roadblock in local foreign currency bond market.

It also suggested that banks could be used as a distribution channel and nodal point for investors to increase retail participation in the market.

"Examine the possibility of having a centralised market maker for retail participants in G-Sec in the long-term who would quote two-way prices of G-Sec for retail/individual investors," it said, adding that banks should be permitted "to obtain limited membership of stock exchanges for undertaking proprietary trades in G-Sec on exchanges."

Also, insurance companies, provident funds and other profit-making entities should be allowed to partcipate in Interest Rate Swap (IRS) market.

The 13-member group, headed by RBI Executive Director R Gandhi, has made various recommendations on G-Sec market, retail participation and interest rate derivatives market.

The annual settlement volumes of outright trades in central government dated securities have increased from Rs 8,62,820 crore in 2004-05 to Rs 30,99,108 crore in 2011-12.

The average daily volumes during this period have increased from about Rs 3,400 crore to over Rs 10,000 crore.

The G-secs (Government securities) comprise dated securities issued by the central government and state governments as well, treasury bills issued by the government The RBI manages and services these securities.