Mumbai: The Reserve Bank of India relaxed curbs on foreign ownership of government debt by raising the cap to 5 per cent, a move that will bring in an additional Rs 1.2 lakh crore in Government Securities (G-Sec). Foreign institutional holdings in G-Sec will be denominated in rupees instead of dollars and the cap will be raised in phases to 5 per cent of outstanding debt by March, 2018, RBI said in its fourth bi-monthly monetary policy for the current fiscal.
According to Finance Ministry estimates, foreign institutional holdings in G-Sec is about 3.8% and RBI said the increase in cap will help attract Rs 1.2 lakh crore.
The move comes ahead of the US Federal Reserve’s much anticipated rate hike, the first in over nine years, that may impact emerging markets. The move is aimed at avoiding a repeat of 2013 when US Fed’s signal that it would end its bond purchases resulted in investors pulling out about $9 billion from G-Sec in June-August that year, leading to the rupee plunging to historic lows.
Meeting a long pending demand of state governments, the RBI also said that there will be a separate limit for investment by FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2% of the outstanding stock by March, 2018.
Meanwhile, Reserve Bank Governor Raghuram Rajan said the RBI is looking into banks’ concern over adopting the marginal cost-based base rate regime but made it clear the lenders will have to follow the new computation methodology.