NOW THIS IS REALLY CONFUSING - TALKING ABOUT CONTROLLING DOLLAR INFLOWS ON ONE HAND .... AND ... READ THE ARTICLE BELOW WHICH HAS COME IN FINANCIAL EXPRESS TODAY!!!!!

New Delhi, Aug 9 Foreign institutional investors (FIIs) and mutual funds may get to invest in debt paper that is below investment grade (aka junk bonds). The government is planning to create a separate segment for such instruments, in effect hiking the present ceiling of $4.7 billion on FIIs investing in Indian paper.

At present, FIIs can invest up to $3.2 billion in government securities and $1.5 billion in corporate bonds, which are mostly above investment grade. The Centre wants to specify a separate cap for debt papers with sub-investment grades.

The finance ministry has discussed the proposal with the Securities and Exchange Board of India (Sebi). An official familiar with the issue said the Reserve Bank of India (RBI) was not against the proposal. The proposal is, nevertheless, still at a preliminary stage and would be formalised only after wider consultations, the official said.

The move is expected to deepen and widen the debt market while at the same time enabling smaller firms, which do not possess top-notch investment ratings, attract FII funding.

The government feels that permitting investment in sub-investment grade securities would put in place one crucial link that is missing in the Indian debt market. It would enable FIIs to invest in bonds that are comparatively riskier but offer higher returns.

Various agencies such as Icra, Crisil, Care and Fitch rate securities. For instance, on the Crisil scale, bonds carrying the BBB (-) rating or better are considered above investment grade.

One leading analyst, however, said the government’s proposal might not necessarily be a favourable move. “It’s a risky proposition and not consistent with our philosophy in the financial sector. We should not allow exposure to unrated bonds,” said the executive director of a major rating agency, who did not wish to be identified.