Budget 2020: Centre may announce increase in FPIs' debt limit to 10%

India seeks entry into global bond index.

Budget 2020 : The Centre is considering increasing the government bond investment limit of foreign portfolio investors (FPIs) to at least 10 per cent of the outstanding, from 6 per cent now, with an aim to incorporate local bonds into global bond indices, according to sources close to the matter. The decision may be announced in the upcoming Budget.

FPIs, including long-term investors, can currently invest up to Rs 3.61 trillion in government bonds, of which they invested Rs 2.16 trillion as of December 12. However, the share allotted to FPIs is inadequate to be included in global bond indices such as those by JP Morgan and Bloomberg-Barclays.

The finance ministry, according to sources, has written to JPMorgan and Bloomberg to advance such inclusion, sources said.

Typically, to be eligible for these indices, the criterion is to offer 15-20 per cent of the outstanding stock to foreign investors and to ensure there is adequate liquidity, as well as choices of derivatives available to hedge the investment risk.

Sources said India’s plan might include a possible sovereign bond, but the Reserve Bank of India (RBI) is opposed to it as the central bank doesn’t want to face a currency risk. However, inclusion in the index itself becomes quasi-sovereign bonds as any investor can invest and transact in those bonds.

The RBI is also not open to more than doubling the investment limit to 15 per cent of the outstanding, which is considered to be a prerequisite for the inclusion. But the central bank wants the government to go slow and first check how the currency risk is covered from the issuer perspective, before increasing the limits further. Hence, any further increase could take another year or two after the 10 per cent limit is declared, possibly in the Union Budget in February.

Financial information firm Bloomberg LP is helping the finance ministry in this respect, and international bodies such as the Asia Securities Industry & Financial Markets Association (ASIFMA) are chalking out how the currency risk, tax issues, and other roadblocks can be overcome. PwC is helping ASIFMA in India in this regard, said sources.

When a sovereign bond is included in a global index, the inflow in that country increases manifold.