State finances: Why FPIs need a reality check before they loosen the purse

Greater scrutiny shows that stagnant revenues and unrestrained freebies have left most of them in a perilous position

Foreign portfolio investors (FPIs) may be allowed to invest larger amounts in state bonds, with an announcement by the Reserve Bank of India (RBI) expected soon. Currently, FPIs are permitted to invest two per cent of outstanding stock securities in state bonds; this could expand significantly to seven per cent. The implication of this expected move on state finances is that it will become necessary to price state bonds with greater transparency, a development that is, however, unlikely to enhance the big picture of state finances.

As RBI’s recent stress test of state finances matched against the yields on their