Government ups FII investment limit in bonds and gilts

Foreign institutional investors (FIIs) can now invest up to $20 billion in corporate bonds and up to $10 billion in government securities. 

The government on Thursday increased the limits by $5 billion each.

The hike, however, comes with riders. The incremental limit of $5 billion should be invested in securities with residual maturity of over five years in either market.

Moreover, in terms of corporate bonds, FIIs can invest the additional amount only in bonds issued by infrastructure companies.

“The tenor limitation that has been specified will incentivise long-term investors and real money investors as compared to short-term hot money,” Hemant Mishr, managing director and head - global markets, South Asia of Standard Chartered Bank said.

The ministry of finance said in a release that the review took into account the need for funds for the country’s infrastructure sector.

In the government bond market, on the other hand, the hike is seen cooling the yields by increasing demand.

“The move will help the 10-year gilt come down to 7.80-7.85% levels in the next 10-15 days,” said Prasanna Patankar, senior vice-president, STCI Primary Dealer.

The 10-year benchmark gilt yield has been in the range of 7.90% to 8.0% so far this month.

“It is a positive move because in a way it effectively puts a cap on government bond yields and credit spreads,” said Mishr.

But with the tenor condition attached to the raise in government bonds, it is expected that there will be more issuances in tenor of 5-10 years.

“It is a possibility that there will be more bonds in the 5 year and above bucket will be issued in the second-half borrowing calendar,” said a senior official at a private bank.