RBI examining pros and cons of relaxing limits for FIIs

The Reserve Bank of India (RBI) is examining the pros and cons of relaxing limits for foreign institutional investors (FII) in government bonds, a senior finance ministry official said today.

Arvind Mayaram, economic affairs secretary at the finance ministry, was responding to a question from reporters about whether India was considering lifting FII limits in order to qualify for inclusion into benchmark global bond indices.

India would also consider allowing local companies to issue rupee-denominated bonds abroad, in a new step in the internationalisation of the rupee. The private sector arm of the World Bank, the International Finance Corp, last month launched a $1 billion rupee-linked bond.

RBI governor Raghuram Rajan had said earlier that Indian officials were speaking to the index compilers about potential inclusion of domestic debt.

Meanwhile, with the rupee continuing to slide and stock markets persisting with heavy selling pressure, the finance ministry swung into action to assure foreign institutional investors (FIIs) of a slew of measures for increasing their participation in currency derivatives and debt markets.

Finance minister P Chidambaram interacted with FIIs yesterday as they expressed concern on taxation issues, the high fiscal and current account deficits, and sought removal of capital gains tax.

After meeting the FIIs, Chidambaram said everyone was bullish and there were no concerns (over exchange rate).

According to the minister who spoke to investors, the government would stick to its target of 4.8 per cent of the gross domestic product (GDP) for the fiscal deficit and $60 billion for the current account deficit (CAD) for 2013-14. Even by the expectations of independent analysts, the government would meet the new CAD target, against $70 billion pegged earlier.

However, the government alone seemed to be confident of reining in the centre's fiscal deficit at 4.8 per cent of GDP, as it constituted 76 per cent of the entire year's budget estimate in the first six months of the current financial year. 

According to officials, the measures could be announced in a month, as they did not need any changes in the law and these would include greater participation for FIIs in currency derivatives market, deepening of the bond markets, liberal conditions for use of collateral on par with domestic investors, clarity on permanent establishment rules and taxation issues.

Meanwhile, Mayaram said, the government would soon come out with clarifications on the definitions of FII and foreign direct investment (FDI) in a couple of weeks.