Even as the existing limits of investment for foreign institutional investments (FII) in Government bonds have nearly exhausted, the Government has no intention of raising the cap. “The finance ministry currently is not in favour of increasing the limits. We have no plan as of now,” a senior finance ministry official said requesting anonymity.
Earlier this month, Reserve Bank of India Governor Raghuram Rajan said that the central bank is looking to expand the FII investment limit at a gradual pace. “...at the appropriate time we will expand them. We are not going to shrink them, but we will expand them steadily at our pace, at a pace we feel comfortable with, at a pace we feel the country can absorb the kind of money that is flowing in,” Rajan said.
However, the finance ministry official said that the central bank has so far not sent any proposal recommending hike in the open category limit. Foreign Institutional Investors (FII), who typically take positions on Indian debt instruments maturing within one to three years, have exhausted 99.6 per cent of their investment limit of $25 billion under the open category, since the month of August. The lack of investment limits has been shutting out FII demand for Indian Government debt.
The finance ministry and the RBI were faced with a similar dilemma in June, when the FII investment limit had nearly filled up. However, on Jul 23, the open category FII investment limit was raised by $5 billion, with the increase being carved out of the investment limits earmarked for long-term foreign investors.
On the other hand, the investment limit quota for long-term investors such as sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks, which was heavily under-utilised then, was reduced to $5 billion from $10 billion. However, it took FIIs barely a month to exhaust even the enhanced limit. Any increase now in the open category FII limits, a finance ministry official said, would involve raising the overall cap on foreign investment in gilts.