Announcing the decision in the 6th bi-monthly monetary policy, the RBI said the move is aimed at meeting the emerging needs of foreign direct investment in various sectors with different financing needs and risk perceptions. It also aims at offering investors protection against downside risks.

Accordingly, the RBI introduced greater flexibility in pricing of instruments/securities, including an assured return at a discount over the sovereign yield curve through an embedded optionality clause or in any other manner.

In another decision, RBI allowed the Sebi-registered foreign portfolio investors (FPIs) reinvestment of coupons in government securities even when the existing limits are fully utilised with a residual maturity of three years.
"To harmonise requirements, it is decided that all future investment by FPIs in the debt market will be required to be made with a minimum residual maturity of three years," RBI said.

Currently, FPIs can invest up to USD 30 billion in Government securities, of which USD 5 billion is reserved for long-term investors. FPIs are permitted to invest in g-secs with a minimum residual maturity of three years. But there are no such conditions to invest in corporate bonds.
"Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of 3 years."

It further said FPIs will not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes. There will, however, be no lock-in period and FPIs shall be free to sell the securities including those that are presently held with less than three years residual maturity to domestic investors.

The RBI also said to develop money and G-sec markets by allowing market participants greater flexibility to hedge their interest rate risks, it has been decided to permit stock exchanges to introduce cash settled IRF (interest rate futures) contracts on 5-7-year and 13-15 year G-secs.

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