The Telegraph
Tuesday , June 26 , 2012
Since 1st March, 1999
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Fresh move to prop up rupee
FIIs can now buy more of govt bonds

Mumbai, June 25: The Reserve Bank of India today raised the ceiling on foreign investment in India’s government bonds by $5 billion even as it allowed companies to float overseas bonds to pay off rupee loans they have taken to buy project machinery.

But the move — which was clearly designed to crank up foreign fund flows into the country and prop up the rupee at a time when the central bank doesn’t have enough elbow room to intervene in the currency market — did not excite investors or markets.

Foreign institutional investors can now purchase $20 billion worth of government securities, up from $15 billion, the Reserve Bank of India said in a statement today.

A new bunch of long-term investors, including sovereign wealth funds, multilateral agencies, endowment funds, insurance and pension funds, were also allowed to invest in gilts directly to broaden the base of investors, the RBI added. Their investments will also come within the $20-billion ceiling on foreign investment in gilts.

Announcing the steps after consultation with the government, the apex bank said Indian companies in manufacturing and infrastructure sector and having foreign exchange earnings could resort to external commercial borrowing (ECB) to repay outstanding rupee loans towards capital expenditure.

Companies can also avail themselves of this route for the fresh rupee capital expenditure that they have made. The overall ceiling for such ECBs would be $10 billion.

However, individual companies can only borrow up to 50 per cent of their average annual export earnings realised during the past three financial years.

This relaxation, experts say will be good news for domestic corporate houses as it will bring down their interest cost. For instance, the one-year London Inter-bank Offered Rate (LIBOR) — a widely used benchmark for short-term interest rates — stands at a little over 1 per cent. The measure may also spur investment as companies will be encouraged to go in for fresh capital expenditure.

The central bank, however, imposed one more condition for FII investment in G-Secs in a bid to discourage hot money or short-term flows into these instruments.

At present, there are no conditions for portfolio investment up to $10 billion. For the rest $5 billion, foreign investors have to invest in G-Secs having a residual maturity of five years. The RBI today said that for the enhanced limit of $5 billion, the residual maturity at the time of first purchase of FII must be at least three years.

Experts point out that the step of allowing new class of investors to invest in G-Secs could see a good response. FIIs have been attracted to G-Secs because they carry virtually zero risk and offer better yields.

“The response of FIIs to G-Secs have been phenomenal. Moreover, there is a serious amount of money waiting to come. In the past, there has been expression of interest from West Asian countries. This will speed up the process,” said Krishnamoorthy Harihar, treasurer at FirstRand Bank India.

The RBI also relaxed the terms and conditions for the scheme for FII investment in infrastructure debt and the scheme for non-resident investment in Infrastructure Development Funds (IDFs) in terms of lock-in period and residual maturity.

Further, qualified foreign investors (QFIs) can now invest in those mutual fund (MF) schemes that hold at least 25 per cent of their assets (either in debt or in equity or both) in the infrastructure sector under the current $3-billion sub-limit for investment in mutual funds related to infrastructure.

A QFI can be a foreign individual, pension fund or companies.