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RBI Eases ECB norms, Ups FII Investment Cap in Corporate Bonds

In an attempt to boost the flaying growth of the Indian economy, The Reserve Bank of India (RBI) has announced a slew of measures to curb the rupee depreciation and improve the market sentiment.

The existing limit for investment by Securities and Exchange Board of India (SEBI) registered foreign institutional investors ( FIIs) in Government securities (G-Secs) has been enhanced by a further amount of $5 billion. This would take the overall limit for FII investment in G-Secs from $15 billion to $20 billion.

The RBI has allowed Indian companies in manufacturing and infrastructure sector and having foreign exchange earnings to avail of external commercial borrowing ( ECB) for repayment of outstanding rupee loans towards capital expenditure and/or fresh Rupee capital expenditure under the approval route. The overall ceiling for such ECBs would be $10 billion.

In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long term investors like Sovereign Wealth Funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of $20 billion.

The sub-limit of $10 billion (existing $5 billion with residual maturity of 5 years and additional limit of $5 billion) would have the residual maturity of three years.

The terms and conditions for the scheme for FII investment in infrastructure debt and the scheme for non-resident investment in Infrastructure Development Funds (IDFs) have been further rationalised in terms of lock-in period and residual maturity.

Further, Qualified Foreign Investors (QFIs) can now invest in those mutual fund (MF) schemes that hold at least 25 per cent of their assets (either in debt or in equity or both) in infrastructure sector under the current $3 billion sub-limit for investment in mutual funds related to infrastructure.

Jonathan Cavenagh, Senior Forex Strategist at Wespac said that the RBI's measures are not the 'shock and awe' the market was looking for. "We shall see what else gets announced. Until they address longer term structural issues around capital flows and competition in the domestic retail sector which can help bring down inflation pressures, I think market will be left disappointed," he said.

Commenting on the RBI's measures, M. Natarajan, Head of Treasury, Bank of Nova Scotia said, "The market was expecting a slew of measures. The measures announced now won't have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels."

The operational/ regulatory guidelines for these measures under Foreign Exchange Management Act (FEMA), 1999 will be issued separately.

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