The government on Saturday announced simplification of removal of norms for foreign institutional investors (FIIs) to invest in government and corporate bonds, in its latest attempt to woo overseas investors to finance the widening current account deficit. 

 

The move, which will be applicable from April 1, was among the major demands made by FIIs during their recent interaction with finance minister P Chidambaram and his team. From next month, the government, Sebi and the Reserve Bank of India (RBI) have decided to remove sub-limits for FIIs within the overall cap for bonds. 

From now on, there will only be two ceilings — a $25-billion limit for investment in government securities that has been formed by merging g-secs (old) and g-secs (long term). In addition, there will be a $51-billion sub-limit for corporate bonds that will include the existing one for FIIs ($25 billion), qualified foreign investors ($1 billion) and $25 billion for FIIs in long term infrastructure bonds. 

Chidambaram told the National Editors' Conference here that Sebi's current mechanism for allocating debt limits for corporate bonds will be replaced by the 'on tap system' that is used for infrastructure bonds. To make the regime more predictable, the government said that the corporate bond ceiling when 80% of the limit was exhausted. 

In case of g-secs, however, the government appeared more cautious and decided to limit the annual enhancement within 5% of Centre's gross borrowings during a fiscal. The government has budgeted for borrowings of Rs 5.79 lakh crore, which means that the government can at best enhance the ceiling for the current fiscal by around $5 billion. 

"The current account deficit (CAD) can be financed only through foreign inflows and that is why I am happy to announce a major rationalization of foreign investment in government securities and corporate bonds," the minister said. FII flows and foreign direct investment are crucial for India to fund its current account deficit that is expected to hit 4.5% of GDP during the current financial year. Large inflows would check against a steep depreciation of the rupee and ensure that there are sufficient foreign exchange reserves to cover for imports. (Times of India)