Rajan hints at higher G-sec limit for foreign investors

MUMBAI: The Reserve Bank of India governor Raghuram Rajan has hinted at increasing the ceiling for foreign investment in government debt. The governor, however, ruled out India being part of JP Morgan bond indices as the ceiling on foreign investment in debt will continue but the central bank is in talks with European bond trading platform Euroclear to encourage foreigners to invest here.
Speaking to analysts during a conference call from Mumbai on Wednesday, Rajan said that the RBI will re-examine foreign investment limit in government debt. Rajan said that he expects the allocation available for foreign investors in government bonds to increase as short-term debt matures, but added the central bank will over time "re-examine the limit and see what we can do".
Commenting on the pros and cons of being included in JP Morgan's bond index, Rajan said, "Inclusion in global indices has some advantages. We become part of portfolio invested by foreign investors. But we know there are issues increasing the vulnerability when things turn the other way. It also requires some changes on our side in terms of regulation and policy," said Rajan. The main roadblock to India being included in the JP Morgan indices is the limit for foreign investors. Global indices require all the debt in the market to be open to international investors.
On FIIs, Rajan said, "We have benefited tremendously from FIIs. They do add liquidity to markets and they do help develop some markets. We have done a few things to encourage them, including reduction in the extent of withholding tax. At the same time, we have taken measures on short-term government debt. We have no plans beyond that to restrict participation," said Rajan.