The government should not open up the debt market to FIIs beyond $5 billion (about Rs 25,000 crore) to support its borrowing plan as it could be counterproductive in the prevailing scenario, industry body Assocham today said.
"It (the government) should not further expand the debt market to FIIs beyond $5 bn to support its huge borrowing plan ... (as) it could be counterproductive since the present market conditions are not conducive to opening up of FIIs further to domestic debt markets," the chamber said. Currently, the cap fixed for FIIs in the debt market is $5 billion, it said.
FII inflows are generally pro-cyclical as they come when least needed and flow out when most critical, creating risks of high interest rates as the money is sucked out, Assocham President Sajjan Jindal said.
The government proposes to borrow Rs 4.5 lakh crore in 2009-10 to support its infrastructure and other developmental projects, "for which one way out is being suggested and i.e. widening the existing cap for FIIs so that these can take part in India’s hitherto almost closed debt market", it said.
"Therefore, opening up the domestic debt market even liberally to FIIs would not seek to answer the growing need of the government for its huge borrowings," Assocham said.
Most of the FII money is in short-term securities and they are not willing to bet on long-term ones, which the government is always looking for, it said.