(Updates with quotes, background, market reaction)
By Suvashree Dey Choudhury and Neha Dasgupta
MUMBAI, July 23 India on Wednesday allowed
foreign fund managers to hold more government bonds, but also
stipulated that in future they will not be able to hold debt of
less than three years.
India allowed foreign institutional investors to hold a
combined $30 billion in India government debt at any one time,
comprising $20 billion for all foreign investors and $10 billion
for long-term investors like sovereign wealth funds,
multilateral agencies, foreign central banks and pension,
insurance and endowment funds.
Under changes announced on Wednesday, the $20 billion limit
will be raised to $25 billion but debt bought after the rule
comes into force will have to be of at least three years, the
Reserve Bank of India said. Previously foreign investors were
allowed to buy government debt of more than one year.
Under the new rule, the additional $10 billion of debt
earmarked only for sovereign wealth funds, multilateral
agencies, foreign central banks and pension, insurance and
endowment funds - but not fund managers - will be reduced to $5
billion. That can be held in debt of at least one year.
As a result, the overall debt held by foreign institutional
investment (FII) will stay at $30 billion, the central bank
said. The effective date of the new rules will be announced
India has attracted strong foreign fund inflows on hopes
that its new business-friendly prime minister Narendra Modi will
ring in faster reforms and give a boost to the country battling
the longest spell of less than 5 percent growth in quarter of a
"I think a reasonable amount of money will flow in," said
Ashish Vaidya, executive director and head of trading and asset
liability management at DBS Bank in Mumbai.
Foreign funds have bought a net $11.95 billion in equity and
$12.73 billion in debt so far this year.
Government bonds have rallied this week on expectations of
changes to the FII limits, after the existing $20 billion cap
was almost fully used up. The changes were confirmed after the
market close on Wednesday but bonds are expected to rise further
The 10-year benchmark bond yield, which has
fallen 11 basis points so far this week, is likely to ease
another 3-4 basis points to 8.63 percent on Thursday, dealers
Bond dealers expect FIIs to use up the additional limit of
$5 billion within six weeks lured by high returns, easing
inflation, and Modi's decisive election mandate to conduct
(Reporting by Suvashree Dey Choudhury and Neha Dasgupta;
Editing by Susan Fenton)