FIIs may get more play in govt paper

G-Sec Investment Cap May Be Raised As Govt Tries To Ensure Its Borrowings Don't Dry Up Liquidity

 THE finance ministry and Reserve Bank of India (RBI) are readying measures to improve liquidity in the system and mute talk of the Centre's massive borrowing programme inflating government bond yields.
    As the first step, the investment cap in government securities (G-Secs) by foreign portfolio investors, or FIIs, is likely to be raised, an official privy to the move said. The current limit for FII investment in government securities is $6.5 billion while for corporate debt, it is $15 billion. FIIs are close to exhausting their investment limits in G-Secs while there is plenty of room for such inflows in corporate debt.
    "Once global debt flows resume, global investors may find government paper attractive. The overall investment ceiling in G-Secs will be relaxed after the current limit is breached," said the official, who asked not to be named.
    Indeed, foreign portfolio investors have been flocking to G-Secs in recent months, especially after the new government took over, buying short-term government paper (91-day and 364-day treasury bills), besides one-year and three-year G-Secs. For these investors, these investments are attractive given the higher yields and short maturity.
    The Centre and RBI will also be making other efforts to send out signals to the market that the borrowing programme will not lead to undue hardening of bond yields. RBI may use CRR to ease liquidity
FOR one, the RBI already has Rs 88,000 crore of Market Stabilisation Bonds for fiscal 2009-10 to tap into. The central bank could use this corpus to lend to the government, thus reducing pressure on fresh borrowings from the market.
    And when appropriate, RBI could also use other monetary tools such as the cash reserve ratio (CRR) to further ease liquidity in the system. The government's gross borrowing programme of Rs 4,50,000 crore for 2009-10 had raised fears that the private sector will be left with little resources once the economy shows signs of picking up.
    Such fears were assuaged by the finance ministry, which has said half of the total borrowings could be done through RBI's Open Market Operations (OMO) window. It now turns out that OMOs need not be conducted on such a large scale, as RBI already has Rs 88,000 crore of MSS bond funds. Also, by easing FII limits in government debt at a later stage, more liquidity can be infused to help soften bond yields. Softer government bond yields have an overall impact in maintaining a moderate interest rate climate.
    Also, government officials said that the the budget document shows a capital outflow of Rs 30,000 crore on account of the government's subscription to new Special Drawing Rights (SDRs) of the International Monetary Fund. This will merely be an accounting entry where the forex reserves will be drawn down and IMF SDRs' balance increased. Therefore, this will have no impact on liquidity, though technically this appears as a borrowing item.