In a conscious bid to bridge the widening current account deficit (CAD), which can be financed only through larger foreign inflows, Finance Minister P. Chidambaram, on Saturday, announced rationalisation of FII (foreign institutional investor) investment norms in both corporate and government bonds.
In his inaugural address at the two-day National Editors’ Conference here, Mr. Chidambaram said that rationalisation would essentially mean doing away with the sub-limits in each of the segments open to FII investment and bunching them to two broad categories to attract more foreign inflows. The changes would be effective from April 1 this year.
Current account deficit
“The current account deficit (CAD) can be financed only through foreign inflows, and that is why I am happy to announce a major rationalisation of foreign investment in government securities and corporate bonds…There were a number of sub-divisions, and in order to rationalise it, it is proposed to merge the existing sub-limits and create only two broad categories,” he said.
Under the rationalisation programme, the limit for FII investment in government securities and corporate bonds, which were enhanced by $5 billion each to take the total limit prescribed for FII investment in government securities to $25 billion and in corporate bonds to $51 billion, would be categorised into two baskets. One basket will consist of government securities of $25 billion which, in effect, will be a merger of old securities and long-term securities.
The second basket will comprise all corporate bonds up to a limit of $51 billion and will mean a merger of the $1 billion sub-limit for qualified foreign investors (QFIs), the $25 billion sub-limit for FIIs and the $25 billion sub-limit for FII in long-term infrastructure bonds.
With the changes in force from the new fiscal beginning April 1, market regulator SEBI (Securities and Exchange Board of India) will be auctioning all bonds — government securities (G-Sec) and corporate bonds — in the same manner in which infrastructure bonds are sold.
Mr. Chidambaram also noted that to enable large investors to plan their investments, the government would review the foreign investment limit in corporate bonds when 80 per cent of the current limit was reached.
“It will also enhance the limit on government bonds as and when needed based on utilisation level, demand from foreign investors, macro-economic environment and the prudent onshore-offshore balance,” he said.
Alongside, however, to provide a guide to foreign investors, Mr. Chidambaram said: “I am happy to state that the annual enhancement of the government bond limit will remain within 5 per cent of the gross annual borrowing of the Central Government, excluding buybacks.”
Ways and means of bridging CAD has become a major concern for the government in recent months, especially as the gap widened to a record high of 5.4 per cent during the July-September quarter of 2012-13, mainly on account of high imports of gold and a marked slowdown in exports.