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The Reserve Bank of India (RBI) is working towards allowing settlements of government bonds in the Euroclear system, the world's biggest securities settlement system, said the central bank's deputy governor, H R Khan, at an event here on Wednesday.
“We have this proposal of Euroclear. There is a budget announcement also on international settlement. We are working on that to see how we can balance between loss of liquidity in the local market, as well as providing ease of trading for overseas investors. Right now, it is only for gilts,” he said.
“The move will help improve acceptability of Indian bonds among FIIs (foreign institutional investors),” said Ashutosh Khajuria, president (treasury), Federal Bank.
Some also say RBI will have to eventually remove the FII limits in bonds towards this end. In July, RBI had raised FIIs' sub-limit in government bonds by $5 billion, after the existing $20 bn limit was almost exhausted. The overall limit was kept unchanged at $30 bn.
RBI is not considering further opening the external commercial borrowing (ECB) route in a major way. Last month, RBI had allowed foreign lenders to issue rupee-denominated loans to Indian companies abroad. “We have been cautious about opening the ECB sector. Bank for International Settlements has come out with a paper on how currency mismatches can create issues. If we open up too much, with people who don't have underlying currency to support that, then there is a problem,” said Khan.
He also said that capital account convertibility was not a determinant for foreign flows or exports to grow. “Most foreign investors are convertible in the capital account. Capital accounts not being fully convertible are not a cause for foreign flows to the country in a big way,” said Khan.
He said the foreign investment regime could be classified in three-and-a-half categories. There is capital brought by multinationals to set up manufacturing facilities or service sector facilities for the domestic as well as global market; capital brought in by professional investors, including venture capitalists; private equity funds for profitable and productive enterprises; capital brought by portfolio investors; and the half being long-term debt brought by direct equity holders.
RBI has been targeting lower inflation and less volatility in the exchange rate. “We have a role to play in terms of reducing external sector vulnerability,” said Khan.
In the past, RBI has relaxed the norms for automatic and approval route investments. Khan said some more liberalisation was likely. Also, T+2 settlement for FIIs in government bonds will soon be introduced. Currently, it is T+1. Any enhancing of the limits on government bonds will be gradual, he said.
RBI has been in the process of building foreign exchange reserves. “You have insurance against a future rainy day, intervention capability and image, and the showcase effect of having reserves that has full impact in the market,” said Khan.
