Background: This circular has been released to set out the investment limits in Government Security (G-Sec) through Foreign Portfolio Investment for the Financial Year 20211-22 which is regulated by Medium Term Framework.
A Government Security is a tradable instrument issued by the Central Government (G-SEC) or the State Governments (named as State Development Loans [SDL]). It acknowledges the Government’s debt obligation. It may be short term (one year or less) or long term (one year or more).
The government has allowed non-residents to invest in G-Sec and SDLs through FPI since 2015 through a Medium-Term Framework which puts a quantitive limit on such investment
1. What is Medium Term Framework and FAR?
In the Union budget of 2020-2021, the Government of India had introduced a new Fully Accessible Route (FAR). It will enable investment by non-residents in securities issued by the Government of India, without any restrictions. In pursuance of this the Reserve Bank of India (RBI) shall notify the Government Securities that shall be eligible for investment under the FAR (specified securities).
These securities will continue to be available for investment by residents. There will be no quantitative limit of investment in specified securities by the eligible investor. However, this system will operate with the two existing schemes – Voluntary Retention Route and the Medium-Term Framework. The Medium-Term framework specifies and sets up quantitative limits on investment in Government Securities according to the period for which such investment is made i.e. Short term or long term.
2. What is the limit proposed for the financial year 2021-22 according to Medium Term Framework?
It is clarified that any investment in the specified security will be reckoned by FAR. Additionally, for other outstanding securities the investment limit under MTF has been kept unchanged at 6% of G-Sec and 2% of SDL of outstanding stocks of securities for FY 2021-22.
The circular has divided the incremental changes (in absolute terms) over the two sub-categories – ‘General’ and ‘Long-term’ in a 50:50 ratio. However, in the case of SDLs (in absolute terms), the entire increase in limits has been added to the ‘General’ sub-category of SDLs. There is no change in the mode of increment in the limits as increments were made in the same fashion as for the FY 2020-21.
3. What is the actual change in limit according to the circular?
The Cumulative FPI limit including G-Sec General, G-Sec Long Term, SDL General, SDL Long Term, and Corporate Bonds, was INR 9,54,280 Crores as of March 31, 2021. The revised limit (in absolute terms) for April 2021-September 2021 period is INR 10,14,957 Crore (G-Sec General – 2,43,914, G –Sec long term- 1,12,914, SDL General-76,766, SDL Long term- 7,100, Corporate bonds-5,74,263)
The FPI investment limit in the debt instruments for October 2021 – March 2022 period is INR 10,75,637 Crores. (G-Sec General -2,53,289, G –Sec long term- 1,22,289, SDL General-85,902, SDL Long term- 7,100, Corporate bonds-6,07,039). These figures are indicative that there is no substantial change. However, eyes will be on the notification of specified securities for getting a clear picture of the status quo of FPI in G-Sec and SDL.
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