In a move aimed at attracting greater capital flows to help fund the current account deficit, the government has allowed foreign institutional investors to invest an additional $10 billion in government and corporate bonds, raising the overall window to $ 75 billion annually.

The finance ministry, at a high level meeting on Friday, decided to create two new categories for FII debt with a $5 billion investment limit for government securities and corporate bonds each.

Long term investors such as pension funds, central banks as well as sovereign wealth funds would be allowed to buy debt from the new FII window for government securities without any stipulated residual, a finance ministry official said, adding that the other window will be open for corporate bonds and gilts.

“A formal notification to make these changes effective will be issued in the next seven to ten days,” the official said, adding that the decision will help bring additional inflows into the country through long term investors.

The finance ministry is also hopeful that the move will help finance the country’s burgeoning current account deficit (CAD) that touched a record high of $21.76 billion in the January-March quarter.

The huge CAD, which is pegged at 3.5 per cent of the GDP in 2012-13, also blamed for the depreciation of the rupee.

At present, foreign institutional investors along with mutual funds and qualified foreign investors are currently allowed to invest up to $ 65 billion in debt every year in several categories including government securities, corporate bonds and infrastructure bonds with each having a separate cap as well as tenor and also lock-in restrictions.

Of this, a $ 25 billion dollar window is kept exclusively for infrastructure bonds.

In order to contain CAD, the RBI has already imposed restrictions on financing of gold purchases to curb speculations of the yellow metal. Gold import during the first half of the fiscal amounted to $20 billion out of the total import of $233 billion.

BRIDGING THE CAD

* FIIs can invest an additional $10 billion in debt instruments after the move

* This raises the overall window available to $75 billion annually

* Long-term investors such as pension funds, central banks and sovereign wealth funds would be able to buy debt from the new FII window without any stipulated residual limit

* The finance ministry is hoping that the decision would help finance the country’s burgeoning current account deficit that is currently pegged at 3.5% of GDP. (Indian Express)