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Wednesday, June 25, 2008

Foreign investment in rupee denominated debt

India has long been doing everything wrong on capital controls for debt instruments.

The Mistry and Rajan reports have recommended opening up to rupee-denominated debt (i.e. reversing the existing bias in favour of offshore, dollar-denominated debt) by placing it on par with FII investments in equity. Also see appendix 1 (page 9) of this paper for a larger understanding of rupee denominated bonds held by foreign investors.

The quantitative restrictions on foreign investments in bonds were recently changed an inch in this direction - from $3.2 billion to $5 billion for FII investments in government bonds, and from US $1.5 billion to US $3 billion for FII investments in corporate bonds.

Quantitative restrictions are pretty abominable things: how do you ration out the overall limit between multiple claimants? SEBI chose to give out quotas on a first-come-first-served basis. Financial Express points out that the quota was consumed in seven minutes. See this very interesting SEBI press release.

How do you prevent financial firms from hoarding a quota and not utilising it? You enact more rules! Once a dirigiste policy framework is created, the maze of rules and restrictions tends to proliferate. SEBI has decreed that the winning firms must utilise their quota within 15 days. As a consequence, these financial firms will tend to become buy and hold investors to a greater extent in the bond market, and not contribute to liquidity and market efficiency to the fullest degree.


  1. It is really sad hearing that India is doing everything wrong but that is true and not limited to financial institutions but people engaging in wrong finance practices.

  2. Interestingly Bear Sterns is on the waiting list.

  3. I feel that this is really very nice and informative post.It really provide great information about foreign investment.


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