The move is expected to stabilise yields, volatile in the recent past.
The overall limit for FII investment in government bonds has been kept unchanged at $30 bn.
As a result on the rise in the sub-limit, that for long-term investors like insurance and pension funds will be reduced to $5 billion.
RBI said the incremental investment limit of $5 billion shall be required to be invested in government bonds with a minimum residual maturity of three years.
Besides, all future investment against the limit vacated, when the current investment by these foreign investors runs off either through sale or redemption, shall also be required to be made in government bonds with a minimum residual maturity of three years.
“The bond market was expecting this for some time. This is a positive step. "The yields can drop by another three to five basis points tomorrow. But this FII money will come only over a period of time.
"We also need to see the operational guidelines to be issued by Sebi (the capital markets regulator),” said Siddharth Shah, vice-president, STCI Primary Dealer.
RBI however, clarified that there will be no lock-in period and FIIs, qualified institutional investore and foreign portfolio investors shall be free to sell the securities (including those currently held with less than three years of residual maturity)
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