RBI relaxed norms of FPI investment in Government Securities

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Who: Reserve Bank of India
What: Relaxed norms of FPI investment in Government Securities
When: 6 October 2015

The Reserve Bank of India (RBI) on 6 October 2015 relaxed the norms of Foreign Portfolio Investors (FPIs) of government debt and also announced higher investment limits in rupee terms in government securities with a view to bring in an additional 1.2 lakh crore rupees by March 2018.

The RBI fixed the FPI investment limits in rupee terms and raised the limits in phases to reach 5 percent of the outstanding stock by March 2018.

RBI directions on FPI investment in Government Securities
• For the fiscal year 2015-16, RBI enhanced the limit for investment by FPIs in Government sectors in two tranches from 12 October 2015 and 1 January 2016.
• The limit will be increased from 1.53 lakh crore rupees to 1.7 lakh crore rupees from 12 October and it will be 1.86 lakh crore rupees from 1 January 2016.
• Those Central Government securities in which aggregate investment by FPIs exceeds the prescribed threshold of 20% will be put in a negative investment list.
• No fresh investments by FPIs in Central Government securities will be permitted till they are removed from the negative list.
• There will be no security-wise limit for SDLs for now. And the operational guidelines relating to allocation and monitoring of limits will be issued by the Securities and Exchange Board of India (SEBI).

All these directions were issued under sections 10(4) and 11(1) of theForeign Exchange Management Act, 1999.

Background
The RBI issued these directions in perusal of the announcement made in the fourth Bi-monthly Monetary Policy Statement for the year 2015-16 issued on 29 September 2015, wherein a Medium Term Framework (MTF) for FPI limits in Government securities was announced to provide a more predictable regime. The features of the MTF were:
• The limits for FPI investment in debt securities will henceforth be announced in Rupee terms.
• The limits for FPI investment in the Central Government securities will be increased in phases to reach 5 percent of the outstanding stock by March 2018. This is expected to bring in additional investment of 1200 billion rupees in the limit for Central Government securities by March 2018.
• Additionally, there will be a separate limit for investment by all FPIs in the State Development Loans (SDLs), this limit will be increased in phases to reach 2 percent of the outstanding stock by March 2018.
• The effective increase in limits for the following two quarters will be announced every half year in March and September.
• The existing requirement of investments being made in Government sectors (including SDLs) with a minimum residual maturity of three years will continue to apply to all categories of FPIs.
• Aggregate FPI investments in any Central Government security would be capped at 20 percent of the outstanding stock of the security.
• Investments at existing levels in the securities over this limit may continue but not get replenished through fresh purchases by FPIs till these falls below 20 percent.