An RBI working group has suggested that investment limit for foreign institutional investors (FIIs) in government securities should be increased gradually.
“Investment limit for FIIs in G-Sec may be increased in gradual steps. The increase in the investment limit can be reviewed on a yearly basis, keeping in view, the country’s overall external debt position, current account deficit, size of government borrowing programme,” the report said.
The investment limit for FIIs in G-Sec is at present capped at $15 billion. RBI’s ‘Working Group on Enhancing Liquidity in Government Securities and Interest Rate Derivatives Markets’ suggested that issue of withholding tax on FIIs should be reviewed as it has been cited as a major roadblock in local foreign currency bond market.
It also suggested that banks could be used as a distribution channel and nodal point for investors to increase retail participation in the market.
“Examine the possibility of having a centralised market maker for retail participants in G-Sec in the long-term who would quote two-way prices of G-Sec for retail/individual investors,” it said, adding that banks should be permitted “to obtain limited membership of stock exchanges for undertaking proprietary trades in G-Sec on exchanges.”
Also, insurance companies, provident funds and other profit-making entities should be allowed to partcipate in Interest Rate Swap (IRS) market. The 13-member group, headed by RBI Executive Director R
Gandhi, has made various recommendations on G-Sec market, retail participation and interest rate derivatives market.
The annual settlement volumes of outright trades in central government dated securities have increased from Rs 8,62,820 crore in 2004-05 to Rs 30,99,108 crore in 2011-12. The average daily volumes during this period have increased from about Rs 3,400 crore to over Rs 10,000 crore. The G-secs (Government securities) comprise dated securities issued by the central government and state governments as well, treasury bills issued by the government The RBI manages and services these securities.
The RBI working group also suggested to consider an electronic swap execution facility (electronic trading platform) for the IRS market, and consider introducing a CCP who may provide guaranteed settlement of trades executed through the electronic platform.
RBI working paper has suggested allowing FIIs to take trading positions in IRF based on overnight rate (call-money) in a calibrated fashion. It also said stock exchanges may take the lead in simplifying futures products and explain trading and arbitrage strategies that can be implemented through futures to
encourage such activity among participants.