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Fixed Income

RBI Policy: FIIs Can’t Buy T-Bills Anymore


So RBI hates short term FII flows.

It has first restricted commercial paper (which is corporate borrowing of less than 1 year) ownership by FIIs to only Rs. 10,000 cr. FII holdings have already been beyond this level and so they can’t buy any more.

Now it has decided FIIs cannot buy short term government paper (T-Bills) at all. In the statement:

To encourage longer-term flows and reduce volatility, FPI investments in G-Secs will henceforth be permitted only in dated securities of maturity one year and above, and existing investment in T-bills will be allowed to taper off on maturity/sale. Any investment limits vacated at the shorter end will be available at longer maturities, so overall FPI limits will not be diminished.

Here’s where FIIs are holding as of Monday:


Whatever FIIs hold, they can sell, or it will mature within the year. They can’t add to their holdings. You will notice that FIIs bought over 20,000 cr. worth T-Bills between November and February, and only since March have reduced their holdings.

Also FIIs are now allowed to hedge their coupon receipts for the succeeding 12 months. This will help of course but require them to take risk on the longer term securities that they can buy.

FIIs bought about 674 cr. of G-Secs (longer term) in April, but have sold about 2500 cr. of corporate debt (long term) and sold 1000 cr. of Commercial paper (short term). Yields in the G-Sec market have crossed 9% on the 10 year bond (though that may be due to a combined impact of the change in liquidity and the FII limits set)

Capital Mind expects G-Sec yields to rise further. We would avoid longer term debt funds at this point, and focus only on the ultra-short terms.


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