As on 1st July 2015, FII debt utilisation stood at 86% of total limits of USD 81 billion of which USD 51 billion is corporate bonds limit and USD 30 billion is government bonds limit. Normally one would assume that USD 81 billion of limits translate into Rs 5143 billion of INR equivalent limits at current INR levels of Rs 63.50 to the USD. Hence if debt utilization limit is 86% of total of USD 81 billion, which is around USD 70 billion, the total purchases of FIIs of INR bonds would stand at Rs 4445 billion at Rs 63.50 to the USD. Of this limit utilization of 86%, government bond limits of USD 30 billion is fully exhausted while corporate bond limits of USD 51 billion is utilized to the extent of 77%.
In INR equivalent terms, FIIs should have invested Rs 1900 billion in government bonds and Rs 2490 billion of corporate bonds, at INR levels of Rs 63.50.
However actual utilization is only Rs 1516 billion in Government bonds and Rs 1893 billion in corporate bonds. At 100% utilization of government bond limits of USD 30 billion, the INR rate at which the limit is set works out to around Rs 50.50 for government bonds. At 77% utilization of corporate bond limits of USD 51 billion, which is USD 39 billion, the INR rate at which the limit is set works out to Rs 48.20 for corporate bonds.
Why this anomaly between INR equivalent limits that ideally should be at around current levels of Rs 63.50 and the actual limits is at Rs 50.50 for government bonds and Rs 48.20 for corporate bonds. The difference between limits available in INR equivalent terms at Rs 63.50 and Rs 50.50 for government bonds is Rs 389 billion and for corporate bonds is Rs 600 billion. Hence close to Rs 1000 billion of limits can be opened up by readjusting the INR reference rate for limit calculations.
The limits are still being calculated at archaic levels of the INR and given INR depreciation of over 25% the government is working to realign the INR reference rate to current levels of around Rs 63.50.
The immediate beneficiary of this realignment will be government bonds as FII’s will rush to fill up the opened limit of Rs 389 billion and will then look to fill up corporate bond limits.