FII caps on G-Sec & corporate bonds hiked

On November 17, 2011, the Finance Ministry raised the investment limit for Foreign Institutional Investors (FII) in government securities and corporate bonds by US$ 5 billion each. FIIs would now be able to invest up to USD 15 billion in government securities and US$ 20 billion in corporate bonds. However, the investment limit for long term infrastructure bonds remains unchanged at US$ 25 billion.     

From the table below, we can see that as on October 31, 2011, FIIs have nearly exhausted the investment limit in government securities and corporate bonds. This move will further give an investment opportunity of approximately Rs 25000 cr in each, government security and corporate bond (assuming a conversion  rate of Rs 50). However, the investment in long term infrastructure bonds is merely Rs 2837 cr (in the first 7 months of FY12 ) versus the limit of Rs 112095 cr (for the fiscal). 

Since infrastructure is a key area where India is still lacking, the government should bring in reforms and attract investments in infrastructure, which can further boost the country's economic growth. The move will help in cooling the 10-year government bond yields, and will reduce the borrowing cost for the government. Further, this will also help in developing our bond market.

We further feel that this move will attract a lot of FIIs, as the interest rate cycle in India is almost at its peak. Going forward, there could be a rise in the prices of the bonds, leading to better capital gains. It will also ease some pressure from the government with respect to the rupee, which has depreciated in the past couple of quarters.

Overall, the move has multiple purposes. such as moving a step ahead for developing the bond market, helping the rupee stabilise, a cool off in the 10-year bond yield to some extent and attracting foreign investment in the country.