According to FII officials, funds are brought in by them only at the time of taking delivery of shares from the stock exchanges. The only liquid cash that may find its way into the treasury bills are those that lie with FIIs for short durations of seven or ten days while waiting for the settlement to take place. An FII equity fund is allowed to invest up to 30 per cent of its corpus in debt instruments, which will now also include treasury bills. But most of them had been investing their full corpus in equities as the only other available debt option was the illiquid corporate debt.

The 100 per cent debt dedicated FII fundshave been given access to the dated government securities in primary and as well as the secondary market. But hardly any investment has been made in this category due to lower domestic interest rates, with the total investment so far made at around $ 100 million, that too mostly in the corporate debt.

"For FII equity funds, the RBI measure will have a positive impact on their cash management. There will be some interest in the 14-day treasury bills," said S Subramaniam, Head of Research, UBS Securities. However, no large scale investment by FIIs in T-bills is expected because of the low interest rate here after taking into account the hedge cost. But in a situation like the one that prevailed immediately after January 16 liquidity crisis, when the YTM on T-bills shot through the roof to 22-30 per cent, FIIs can move in swiftly for the kill. "The measure will bring in big difference for the T-bills market in the long term by allowing one crucial participant in the form of FIIs. This will broad base theT-bills market which was hitherto restricted to banks and will provide a counter point at times of high volatility in domestic short term rates," said Nilesh Shah, fund manager, Templeton debt funds.

From the foreign institutional investors' point of view they will get some lee way in managing the short term funds between settlements because it will be cheaper for them to hold it in T-bills rather than transporting it to and for from their foreign base. Custodians of foreign institutional investors may incorporate management of short term funds as part of their service.The hundred per cent dedicated debt funds of FIIs is likely to continue in limbo due to the low interest rates here, the FII equity funds will get some lee way in terms of cash management as a result of the Reserve Bank of India announcement.