The Reserve Bank of India (RBI) is evaluating the investment limits for foreign investors in the overnight index swap (OIS) market. Deputy Governor Michael Debabrata Patra addressed this topic during the post-monetary policy press conference on Thursday.
Current Utilization
- Investment Limit: Foreign investors have used 96% of the allocated Rs 3.5 billion limit for OIS transactions.
- Market Status: The OIS market, a derivative market linked to the government bond market, provides a platform for hedging against interest rate fluctuations.
Recent Developments
- Increased Trading Activity: Following JPMorgan’s inclusion of Indian bonds in its emerging market debt index last September, there has been a significant uptick in trading activities in the OIS market.
- Potential Changes: Deputy Governor Patra suggested that excluding new 14-year and 30-year government bonds from the Fully Accessible Route (FAR) might increase demand for 5-year to 10-year bonds. This shift could enhance liquidity, improve price discovery, and reduce transaction costs.
Industry Reactions
- Vikas Goel’s View: Vikas Goel, MD and CEO of PNB Gilts, noted that increased demand in the 5-year and 10-year segments is expected. He emphasized the importance of stable rules to avoid uncertainty.
- V R C Reddy’s Insight: V R C Reddy, head of treasury at Karur Vysya Bank, highlighted that the real demand lies in 5/10-year papers, explaining the rationale behind removing the longer-tenure papers.
Foreign Investment Guidelines
- Current FPI Investment: Foreign Portfolio Investment (FPI) in FAR securities has reached Rs 2.10 trillion, surpassing Rs 1 trillion in October 2023.
- Updated Guidelines: Under the new rules, foreign investments in the new 14-year and 30-year tenors will follow the existing RBI limit, capping holdings at 6% of a government bond’s outstanding limit. These securities remain accessible to foreign investors in the secondary market.
Multiple-Choice Questions (MCQs):
- What percentage of the Rs 3.5 billion limit for OIS transactions has been utilized by foreign investors?
- A) 85%
- B) 90%
- C) 96%
- D) 100%
- Which segment is expected to see increased demand due to the exclusion of new 14-year and 30-year government bonds from the Fully Accessible Route (FAR)?
- A) 1-year to 3-year bonds
- B) 5-year to 10-year bonds
- C) 15-year to 20-year bonds
- D) 20-year to 30-year bonds
- What was a significant factor leading to increased trading activities in the OIS market?
- A) Introduction of new 30-year bonds
- B) JPMorgan’s inclusion of Indian bonds in its emerging market debt index
- C) Reduction of RBI investment limits
- D) Decrease in government bond issuance
- What is the cap on foreign investors’ holdings of a government bond under the new guidelines for the 14-year and 30-year tenors?
- A) 3%
- B) 4%
- C) 6%
- D) 10%