RBI relaxes foreign investment rules in debt markets

A man walks past a logo of the Reserve Bank of India (RBI) in front of its building in Kolkata May 21, 2012.

MUMBAI (Reuters) - The RBI on Thursday relaxed some of the rules for foreign institutional investors (FIIs) buying into domestic debt as part of the government's long-expected $10 billion increase in corporate and government debt limits.

The Reserve Bank of India removed some of the restrictions mandating FIIs must buy into debt with a minimum maturity, which is known as the residual maturity. It also announced the removal of rules requiring FIIs to hold infrastructure debt for at least one year, in what is known as a lock-in provision.

RBI announced the eased restrictions in a notification stating limits on government bond investments would be raised by $5 billion to $25 billion for FIIs, and by $5 billion to $50 billion across corporate bonds.

The measures had been previously announced by the government, but have not yet been formally unveiled by market regulator Securities Exchange Board of India, which oversees foreign investments into the country.

India is looking to attract foreign capital investment at a time when Asia's third-largest economy is seeing its slowest economic growth in a decade. Finance Minister P. Chidambaram is currently overseas meeting investors in a four-city roadshow.

The measures were welcomed by bond investors. FIIs have long complained about India's complicated system for investing in debt, which includes different categories of investors and a number of restrictions.

"The removal of lock-ins in infrastructure bonds and residual maturity in government debt would increase operational and portfolio management flexibility for foreign investors," said Arvind Chari, a debt fund manager at Quantum Asset Management.

Quantum as a group manages and advises more than $1 billion in equities and $250 million in fixed income.

As part of the increase in government debt limits, the RBI announced removal of the clause that had mandated first time FII purchasers of dated government bonds must buy securities with at least three-year residual maturity.

As a result, these buyers will not longer face any maturity restrictions on dated government securities, although they will not be allowed to invest in short-term paper such as treasury bills.

Regarding corporate bonds, the RBI added that FIIs would not able to buy certificates of deposits or commercial paper as part of the enhanced $5 billion limit.

The revised limit for non-infrastructure corporate bonds will be available for investment by FIIs and long-term investors such as sovereign wealth funds and multilateral agencies.

The RBI also removed the one-year lock-in period for the majority of infrastructure bonds although it kept the rule that FIIs must buy debt with a residual maturity period of at least 15 months.

(Editing by Rafael Nam and Richard Borsuk)