India Tightens Limits on Foreign Investment in Treasury Bills

The Indian government has introduced more restrictive limits on foreign investment in treasury bills and commercial, while easing and simplifying other restrictions to attract inflows in an effort to trim the country’s record current account deficit.

The Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI) announced details behind a recent government decision to overhaul restrictions on foreign investment in government and corporate debt.

Following an announcement by the government’s finance minister, P Chidambaram, Indian regulators have divided debt instruments into two categories. Foreign investors are allowed to invest up to rupees (INR) 25bn in government debt overall and up to INR51bn in corporate debt, both authorities said.

At the short-term end of the market, however, foreign investors will be allowed to buy up only to INR5.5bn in treasury bills and up to INR3.5bn in corporate commercial paper.

The authorities did not provide an explanation behind the new sub-limits. They removed sub-limits on all other types of bonds.

Indian corporate debt previously sold to foreign investors at auctions in which they bid to buy up to certain limits, or quotas. They will now be free to buy corporate bonds ‘on tap’, or at will, until 90% of the INR51bn limit is reached. At that point, the previous system of bidding for quotes will kick in for the remaining 10%.

Heavy oil and gold imports helped drive India’s current account deficit to a record high amounting to 5.4% of gross domestic product (GDP) in Q412.

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