RBI allows FPIs to invest in treasury bills

The Indian Express
May 02, 2018

The Reserve Bank of India (RBI) on Tuesday said Foreign Portfolio Investors (FPIs) will be allowed to invest in treasury bills issued by the government in a move that could lead to more foreign portfolio investment in India. The RBI announcement came two days after it allowed foreign investors to invest in government and corporate bonds with tenures below one year.

However, it did not indicate when the change on investment in T-bills would come into force. “FPIs are permitted to invest in treasury bills issued by the Central government,” the RBI stated in a circular.

The requirement that investment in securities of any category — government securities, state development loans (SDLs) or corporate bonds — with residual maturity below one year should not exceed 20 per cent of total investment by an FPI in that category applies, on a continuous basis. “At any point in time, all securities with residual maturity of less than one year will be reckoned for the 20 per cent limit, regardless of the maturity of the security at the time of purchase by the FPI,” the RBI said. “If a non-resident entity has set up five funds, each registered as an FPI for investment in debt, total investment by the five FPIs will be considered for application of concentration and other limits,” the RBI circular said.

The changes to investment by FPIs come amid weak investor interest at two recent government bond auctions, following hawkish central bank statements, that led to a spike in sovereign debt yields. FPIs have been selling, particularly in the debt segment, as bond yields were rising and system liquidity came down. The yield on 10-year benchmark bond has gone up from 6.5 per cent in August last year to 7.75 per cent now. The rise in yields has led to huge losses, to banks and institutions.

On April 29, the central bank had withdrawn the minimum residual maturity required by FPIs to invest in central government securities and state development loans, subject to a condition that investment in securities with residual maturity below one year should not exceed 20% of the total investment of that FPI in that category. So far, FPIs were required to invest in G-secs with a minimum residual maturity of three years.

For corporate bonds, FPIs are permitted to invest in papers with minimum residual maturity of above one year. The step is likely to bring in considerable foreign fund flows into short-tenor paper—arguably an attractive segment for foreign investors.

The central bank had also recently harmonised the all-in-cost ceiling for external commercial borrowings over the benchmark rate. While the all-in-cost ceiling ranged from 300 to 500 basis points for different maturities and different track classifications earlier, the central bank has mandated a uniform ceiling of 450 basis points over the benchmark rate. The benchmark would be six-month USD LIBOR (or applicable benchmark for respective currency) for Track I and Track II, while it will be prevailing yield of the Government of India securities of corresponding maturity for Track III (Rupee ECBs) and RDBs.

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