Time to realign rupee reference rates to current levels for bonds!
From the total USD 81 billion Foreign Institutional Investor (FII) debt utilization limit, corporate bonds and government bonds constitute USD 51 billion and USD 30 billion respectively. This means 86% of total limit is covered in corporate bonds and remaining in government bonds.
Going by the same calculation, at present rupee levels of about 64, pegged against the American dollar, USD 81 billion should convert into Rs. 5,143 billion rupees in the correspondent limts.
The real catch
As government debt is 86% of total limit (about USD 70 billion) the total debt bought out by the FIIs should come equal to Rs. 4445 billion at Rs. 63.47 (at the time of going to press) to the USD. Up till now, government bonds limit of USD 30 billion has been exhausted and corporate bond limit has been used up to 77%. This amounts to Rs. 1,900 billion in government bonds and Rs 2,490 billion of corporate bonds, at rupee levels of Rs. 63.50 of investment made by the FIIs in equivalent terms. Nonetheless, real consumption is only Rs. 1,516 billion in government bonds and Rs. 1,893 billion in corporate bonds. You can yourself imagine what the figure will be when 100% utilization is done.
Reason for this abnormality
The reason is that government calculates the investment by keeping INR fixed at 50.50 for government bonds and Rs. 48.20 for corporate bonds and not Rs. 63.47, the current value.
This difference adds up to loss of Rs. 389 billion for government bonds and Rs. 600 billion for corporate bonds. This is due to about 25% depreciation in the value of rupee from present level.
Realign INR at the earliest
Considering the loss of close to Rs. 1000 billion, government is working to realign the INR reference rate for limit calculations to current value.
As Tamal Bandyopadhyay puts it, “FIIs’ exposure to government bonds is not even 5% compared with at least 40% in countries such as Indonesia and Malaysia. With $354 billion foreign exchange reserves and a modest current account deficit, RBI can certainly allow FIIs a larger play in government debt as long as it is done gradually.” It will surely help the government to earn more revenue.