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RBI raises short-term investment limit of FPIs

With foreign investors dumping Indian debt but keeping up their investment in equities, the Reserve Bank of India (RBI) on Thursday increased the short-term investment limit of such investors. It doubled the limit in case they voluntarily disclose their investment plan before hand. In two separate notifications, the central bank said foreign portfolio investors (FPIs) can now invest 30 per cent of their portfolios in central and state government securities, including in treasury bills, from the 20 per cent earlier.

Similarly, in corporate bonds, too, short-term investments can now be 30 per cent of the portfolio from 20 per cent earlier. The FPIs have long lobbied against raising short term limits. Getting locked in investments, maturing in three years, is detrimental to the interest of portfolio investors who chase high short-term yields. They expect the currency to remain stable during their investment period.

The investors not only take currency risk in the period, but also face the issue of rising yields. Now that the RBI’s rate cutting cycle is nearing an end, the yields are expected to rise. As yields rise, prices of bonds fall, causing losses to investors. Besides, the central bank encouraged foreign investors to invest in debt instruments issued by asset reconstruction companies (ARC), and by an entity under the corporate insolvency resolution process. With foreign investors dumping Indian debt but keeping up their investment in equities, the Reserve Bank of India (RBI) on Thursday increased the short-term investment limit of such investors. It doubled the limit in case they voluntarily disclose their investment plan before hand.

In two separate notifications, the central bank said foreign portfolio investors (FPIs) can now invest 30 per cent of their portfolios in central and state government securities, including in treasury bills, from the 20 per cent earlier. Similarly, in corporate bonds, too, short-term investments can now be 30 per cent of the portfolio from 20 per cent earlier.

The FPIs have long lobbied against raising short term limits. Getting locked in investments, maturing in three years, is detrimental to the interest of portfolio investors who chase high short-term yields. They expect the currency to remain stable during their investment period. The investors not only take currency risk in the period, but also face the issue of rising yields. Now that the RBI’s rate cutting cycle is nearing an end, the yields are expected to rise. As yields rise, prices of bonds fall, causing losses to investors.

Besides, the central bank encouraged foreign investors to invest in debt instruments issued by asset reconstruction companies (ARC), and by an entity under the corporate insolvency resolution process.

SOURCE: The Hindu, Business Standard

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