Rajan said the RBI will remove limits on foreign participation in the bond market ‘once the world becomes excited in a more substantial way about the India story’

Mumbai : The Reserve Bank may look at lifting cap on foreign holding of government debt in two years, once the economy has reached its potential growth rate, Governor Raghuram Rajan has said.   “The RBI will remove limits on foreign participation in the domestic bond market ‘once the world becomes excited in a more substantial way about the India story’,” Rajan told Euromoney magazine in an interview.    “This could happen once the economy reaches potential output over two consecutive years and foreigners organically move to long-end maturities, giving regulators a degree of confidence about the stickiness of flows,” Rajan said.         “We want a steady increase in limits — a measured increase — so that we understand what is happening and we see the market developing as these limits are increased. We do think FPIs (foreign portfolio investors) are extremely important to market development,” Rajan had told analysts during the post-policy tele-conference on October 1. Even though FIIs reportedly exhaust over 95% of their $25 billion investment limit in government debt, Rajan hinted that there is no need to increase the limit immediately.

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