FPI limit in long-term government securities may be hiked

FPIs are currently capped at 5 per cent of the total outstanding government dated securities, and own 4.5 per cent

The government and the Reserve Bank of India (RBI) are highly likely to increase the foreign portfolio investment (FPI) limit in long-term government securities (G-secs), Business Standard has learnt.

The official announcement will be made before the end of this week.

Policymakers from North Block and Mint Road have been discussing the possibility of raising the FPI limits in government securities, along with deliberations on the borrowing programme for April-September 2018.

Senior government officials confirmed that a hike in FPI limit is on the cards.

However, they declined to comment on how much the increase could be in percentage or absolute terms.

FPIs are currently capped at 5 per cent of the total outstanding government dated securities, and own 4.5 per cent.

Market observers say that an increase is necessary to make up for a reduction in demand from domestic banks.

In a report dated March 15, research firm Nomura had said that a 1 per cent increase in the FPI cap, from 5 to 6 per cent would increase the limit by Rs 80,000 crore (Rs 800 billion) in absolute terms.

“This, in our view, would be meaningful for FPI bond demand and should support bond markets in 2018-19,” it had said.

According to data on the National Securities Depository’s website, as of March 26, FPIs have invested Rs 1.84 trillion in dated central government securities, thus utilising 96.4 per cent of the upper limit of Rs 1.91 trillion.

Long-term FPIs have utilised nearly 82 per cent of the upper limit of Rs 65,100 crore (Rs 651 billion).

On Monday, the Centre had said it would be borrowing Rs 2.88 trillion in April-September 2017, around 47.5 per cent of the full year budgeted estimate of Rs 6.05 trillion.

Economic Affairs Secretary Subhash Garg had said the Centre would draw an additional Rs 250 billion from the National Small Savings Fund (NSSF) to finance the fiscal deficit for 2018-19.

The RBI will reduce its planned buybacks of government securities by Rs 25,000 crore (Rs 250 billion).

Hence, the gross borrowing for the year will be reduced by Rs 500 billion to Rs 5.56 trillion.

Net borrowing, which was budgeted at Rs 4.62 trillion, will see a reduction of Rs 25,000 crore (Rs 250 billion) on account of higher amount drawn from the NSSF.

Net borrowing for 2018-19 will now be Rs 4.27 trillion.

Photograph: Thomas White/Reuters