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Economy

RBI Does Piecemeal Reform on Foreigners Buying Debt

RBI has increased the limit on foreign investment in Rupee Denominated Government Bonds to $20bn from $15 bn. (And in a timely way, Dheeraj and I wrote an article exhorting such a move in the Business Standard on Sunday. However, the amount increased is too little to be significant.)

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They have retained short term investment limits at $10bn, and for the remaining, they stipulate a minimum maturity of 3 years instead of 5.

Other measures:

Foreign investment in Infrastructure debt has been liberalized a tiny bit. The original limits were $5bn of one-year lock-in and one year residual maturity, and $10 bn for foreign investment in infrastructure debt funds (IDFs, that had a lock-in of three years and a maturity requirement of 5 years). The new limits reduce the lock-in to one year, and the residual maturity to 15 months. The overall limit of $25 bn in such corporate debt stays.

(Currently, there are very few takers among foreign investors for long term corp debt. No interest in IDFs. Only 65% of the 22,419 cr. of short term – 1 yr lock in, 1 yr residual maturity – corporate debt has been subscribed. In comparison short term GOI debt is nearly fully subscribed, with long term GOI debt about 90% taken)

Manufacturers and Infrastructure companies will be able to borrow abroad to repay their rupee loans that were borrowed for capex. They should be a foreign exchange earner, and the loan can only be upto 50% of average exports. But they have to pay back the loan through their forex earnings only. All such loans require RBI approval, and are limited to $10 bn in total.

These measures are supposed to shore up the rupee. This won’t do much, in my opinion.

  • SEBI has to auction the debt limits. This will happen on the 20th of July.
  • Hedges at the 3 yr term are very costly. Since 3 years is the minimum time to maturity for the enhanced limits in the near-risk-free GOI securities, the lack of market hedges will remain a concern.
  • In the last auction, while the short term GOI securities were oversubscribed, FIIs bid for only 63% of the 3800 cr. limits for longer term GOI debt (with the min-5-yr maturity).
  • The $5bn amount is not much. There is no interest in the rest of the stuff – though short term corporate debt might show some action.
  • This is a tiny measure, overall. A piecemeal increase in limits won’t do anything. In fact, adding such restrictions (lock-in, residual maturity) just muddies the picture. No adequate measures are provided to hedge the risks; market instruments for long term hedges against dollar falls are very few or too expensive, and restricted in size. There is no real CDS market to cut the credit risk to corporate. There is no attempt to actually FLOOD in dollars, which will only happen if you truly open the market. At this rate my grandchildren will see real reform.