RBI has finally moved to helping foreigners buy some more debt, as the debt limit for G-Secs has been rejigged. Foreigners (actually, Foreign Portfolio Investors or FPIs) can only buy Indian debt upto a limit.

For Government Securities: From the earlier limits of $20 bn (for FPIs) the limit has been raised to $25 bn. The extra $5bn can only be used to buy securities of residual maturity of 3 years or more. It’s likely that they use the conversion rate of Rs. 50 to a dollar (as is used for the rest) which means an additional 25,000 cr. can be invested in G-Secs.

Since the overall limit of $30 bn hasn’t been changed, there is a reduction by $5bn in limits for investments by FPIs of a specific sort (Sovereign Wealth Funds and the like) which had an earlier limit of $10bn (now cut to $5bn).

Update: RBI has also mandated that any new purchases by FPIs, even within the original $20bn limit, will have to be of 3 year residual maturity or more. This is something I overlooked. (Thanks alert reader BK!) Basically this means that FIIs can’t even buy debt that matures in 2015 or 2016 – there has to be at least the years left. If they already hold such debt, they needn’t sell it – just that when that is redeemed, they have to buy longer term-to-maturity debt.

There is no “lock-in” – meaning, even if they buy debt maturing in 2017, they can turn around and sell it tomorrow.

The new limits will be:

  • $25 bn (3 year residual maturity or more)
  • $5 bn (only specified types of FPIs, in certain types of g-secs).
  • They can’t buy any T-Bills anyhow.

Isn’t this unnecessary? We should just have one overall limit. I don’t even like the concept of a limit. I think we should free our currency. But I digress.

Look at the FPI investments today (23 July 2014):

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They are full up on Govt Debt (FPIs) which are available regularly. The specific FPI limit is for about Rs. 50,000 cr. which will fall to about Rs. 25,000 cr., and current investments are about half of that, so there won’t be a problem.

Overall Bond Holdings have gone above 200,000 cr. (by FPIs).

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There’s a lot of interest in Indian debt, especially since the rupee has stabilized at 60. Bond yields of the 10 year (8.83% Nov 2023 bond) are at 8.66%. However there is a new 10 year bond starting this Friday, and that in the “when issued” market trades around 8.38%, which is ludicrously low, considering even short term T-Bills are at 8.6%.

For the near term, this news will help bond prices.

The increase in the debt limit will increase interest in the bonds, and yields are likely to fall a little from here (i.e. prices go up). But this is quite likely to be short-lived, because the drought fear hasn’t gone away yet, and we are still at 27% below normal. Vegetable prices are still sky high.

RBI meets on August 5, to tell us about policy going forward. Rates should, in general, be reduced as inflation has come down. The risk, however, is of a bad monsoon, and veggie prices are already up. I would say there’s a 70% chance of a rate cut and 30% chance he’ll postpone to two months later. (Note: I plucked the percentages from the air, but it’s kinda sorta what it feels like)

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