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RBI to hike FIIs' government bond limit

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The Reserve Bank of India (RBI) is planning to raise foreign institutional investment (FII) into the government securities market after the FII limit of $30 billion is fully utilised.

RBI governor Raghuram Rajan said in a post policy interaction with analysts that there is an unfulfilled demand for sovereign bonds. "We have in mind a schedule of expansion. Don't despair. We will expand, but not at the rate at which the market want us to expand. But the rate at which we are able to absorb FII investment."

The investment limits into government securities are already utilised while the FII investment into the corporate bond segment is not utilised. FIIs are permitted to invest up to $30 billion into government bonds and the investment limit in corporate bonds is $51 billion.

Ashutosh Khajuria, president treasury and head of credit, Federal Bank, said, "The FII limits into government securities are fully utilised as the FIIs find it an attractive investment option with no credit risk. Whenever limits are utilised, RBI and the government look at enhancing the limits. But no central bank would want a volatility in the interest rates markets so the limits are always under check."

With the US treasury yields picking up, FIIs see an attractive interest rate differential in India. The 10-year US treasury bonds inched up 4.5 basis points to 2.24% and the 30 year bonds rose 2.8 basis points to 2.97% on Monday.

Sidharth Rath, head of treasury, Axis Bank, said, "The yield pick-up in the US is a major attraction for the FIIs to come to India. The currency is stable so there is no currency risk and they are also confident of the growth possibilities of the Indian economy."

With the yields on government bonds falling below 8% on Tuesday, the rally in the debt market is expected to continue whetting the interest of foreign institutional investors to flock to the Indian market to take advantage of the interest rate differential.

India's debt and swap markets rallied on Tuesday as the RBI reinforced expectations of an interest rate cut early next year. The benchmark 10-year bond yield, which rose three basis points (bps) in the immediate aftermath of the policy review, closed down 9 bps at 7.97%, after touching 7.95% intra-day, its lowest level since July 19, 2013.

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