India can easily increase the limits of FIIs in G-Secs by $5-$30 billion to shore up its foreign exchange reserves thus providing a cushion against potential volatility in the global currency markets, an expert report said Friday.
According to the Bank of America Merrill Lynch (BAML) report, the central government can also do away with separate limits for sovereign wealth funds (SWF) within the overall $81 billion foreign institutional investors' (FIIs) debt limits.
The BAML said the FIIs have utilised 97.4 percent of their $25 billion limit following the $2.6 billion inflow Wednesday.
According to BAML, the separate SWF limits are not being utilised as many of them invest in the Indian paper through FIIs.
The BAML said the increase in limits of FIIs in G-Secs will help to raise the foreign exchange reserves to guard against effects of global currency market volatility.
"In case of outflows, India will be no worse off if the RBI (Reserve Bank of India) buys the FX (foreign exchange) during inflows," the report states.
Secondly, FII inflows into government securities are easier to attract as RBI rate cycle is peaking. And the interest in corporate debt will take time as concerns about corporate stress remain, says the BAML report.
According to the report, the corporate debt market is still not very liquid, especially in comparison to the G-Sec market, as it is dominated by long-hold investors, like insurers.
Further, it is not realistic to expect that debt FIIs can be pushed into corporate debt to get India debt exposure if the G-Sec quota is filled up.
According to the report, higher FII inflows into G-Sec should help to bring down the lending rates following the RBI's 100 basis points cut in the statutory liquidity ratio.
