The RBI has created a separate limit for the foreign portfolio investors investing in the interest rate futures (IRF) market -- a market normally tapped by those holding government securities to hedge interest-rate risks. By doing so, the central bank has indirectly raised the bond holding limit of FPIs.
"It is proposed to allocate FPIs a separate limit of Rs 5,000 crore for long position in IRFs," RBI said in the policy statement. "The limits prescribed for investment by FPIs in government securities will then be exclusively available for acquiring such securities."
Interest rate futures (IRFs) are no different from stock and currency futures on which individuals and institutions bet either to trade or cover risks against bond investments. In IRF contracts, a trader will go long when he expects the price of the 10-year underlying bond to rise.
"There are a few FPIs, who trade in interest rate futures," said Sandeep Bagla, associate director at Trust Capital Services. "With this separate limit, others too can join them. Overall the move will give more space for FPI participation."
"RBI too does not need to worry about exchange rate risk as long as IRF trades are concerned," he said.
Overseas investors have been aggressively investing in Indian debt securities. But they have exhausted 99.34 per cent of the total limit now at Rs 1,87,700 crore, shows data from National Securities Depository. They have nearly used up the full limit in corporate bonds pegged at Rs 2.26 lakh crore.
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