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RBI To Hike FPI G-Sec Limit By $5 Billion: BofAML

Analysts at BofAML anticipate the Reserve Bank of India will hike FPI G-Sec limits by $5 billion, as demand for G-Sec from FPIs will diminish if the central bank rate cuts run their course.

Hak Bin Chua and team at Bank of America Merrill Lynch in their June 26, 2015 report titled: “India: three reasons to expect FPI G-sec limit hike” anticipate the RBI to trim 50bp more by January 2016.

Hike in FPI G-sec limit

The BAML analysts offer three reasons for an increase in the FPI G-sec limit. First, the analysts anticipate demand for G-sec from FPIs will diminish as the RBI rate cuts finish up. Secondly, they say “hot” money worries are overdone, as the RBI is buying the FX leg into FX reserves. Lastly, the analysts believe unwilling FP investment in quasis would pose a risk if EM bonds sell off.

As detailed by ValueWalk, an earlier report titled: “Investorspeak: Waiting for Godot (aka…)” anticipated the RBI to hike foreign portfolio investors’ G-sec investment limits only towards end-2015 after the markets have priced in the anticipated September U.S. Fed rate hike. The analysts expressed their view after their meeting earlier this month with fixed income investors in Boston and New York. They indicated that the fixed income investors wanted to know when the RBI will hike FPI G-sec limits.

In their latest research report, the analysts anticipate the RBI to hike FII G-sec limits by $5 billion if there is a Greek deal this week, with the Fed seen as more dovish than expected last week:

FPI G-sec limit almost full

They point out that their latest views would be in line with their anticipation of a $5 billion hike in FPI G-sec limits in fiscal year 2016, and highlight that originally they anticipated this after the budget. However, they note there is now a second window, but if the RBI delays further, it can only act after the markets have priced in the Fed.

FPI appetite would shore up FX reserves

Chua and colleagues at BAML note converting the $30 billion limit in current INR terms opens up an additional $5.9 billion FPI limit in G-secs.

$6 billion would be freed up FPI G-Sec

They argue that there is substantial FPI appetite for G-secs to play India’s falling rate cycle that the RBI could use to rebuild FX reserves. Moreover, the INR tends to depreciate when the import cover, now 9.3 months, slips below the eight-month level:

INR stabilized beyond 8m import cover FPI G-Sec

However, the analysts point out that once the RBI’s rate cuts are done, Indian G-secs will likely look far less attractive:

Strong INR attracts FII debt flows FPI G-Sec

As CPI inflation is set on under -6% by January 2016, the analysts anticipate the RBI to trim 50bp more. However, they note the timing (August and October or early 2016) would depend on rainfall and market pricing of their expected September Fed rate hike.

CPI on track FPI G-Sec

The BAML analysts note debt FPIs have invested in quasi G-secs, as the $30 billion FII G-sec limit is filled up. They argue that the RBI should hike the FPI G-sec limit to drain its unwilling exposure in quasis into willing holdings in G-secs.

Chua and team don’t anticipate a hike in FII G-sec limit to result in INR appreciation, as they believe the RBI will buy up all FX inflows. They anticipate RBI to persist with token resistance at Rs 63-64/USD for now and defend Rs 65/USD by selling $15 billion.

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