Regulatory Steps
Can limit list of fully accessible bonds to curb FPI flow, says finance secy
This story was originally published at 19:52 IST on 24 July 2024
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By Pratigya Vajpayee, Priyasmita Dutta and Sagar Sen
NEW DELHI – As of now, the government is not perturbed by the foreign investment flowing into the bond market because of India's inclusion in global bond indices. However, once the inclusion is complete, the government could restrict the addition of new bonds to the fully accessible route, if needed, to keep a check on foreign fund inflows, Finance Secretary T.V. Somanathan said.
"See, there can be measures, there are regulatory measures. You see that accessibility rules are an instrument which potentially can be used. Until 2020, the government used to declare a percentage of each government security that was accessible to foreigners and there was a cap of 10%. In 2020, fully accessible route was introduced," Somanathan told Informist.
"All new securities will be on a fully accessible route. That can always be changed for incremental new securities. Existing security will never be changed. Any person who has purchased a security thinking that it is fully accessible, it will be fully accessible. But it doesn't mean that every future security has to be fully accessible. Incrementally, we can change. It is an important instrument," he said.
On Jun 28, JP Morgan added 29 bonds under the fully accessible route for inclusion on the Government Bond Index – Emerging Markets suite on Friday. Bonds available under the fully accessible route do not have any restriction on the extent of permissible foreign investment. Outside of this route, foreign portfolio investors can buy up to 30% of the outstanding stock of a given bond.
Full accessibility was a key factor that enabled the inclusion of Indian bonds in global bond indices as it facilitates ease of investment and trading. When the fully accessible route was introduced in April 2020, the Reserve Bank of India notified a list of specified securities available under the route. In addition, all new issuances of government securities of 5-year, 10-year and 30-year tenors from financial year 2020-21 would be eligible for investment under the fully accessible route as 'specified securities', the RBI had said, when rolling out the scheme. Later, this list was augmented to include benchmark securities in more tenors. As per norms, the RBI may add new tenors or change the tenors of new securities to be designated as 'specified securities' from time to time.
The government's apprehension is about possible volatility that could emerge once foreign ownership of Indian bonds grows in scale, Somanathan said.
"Apprehension is very much there. Apprehension is not during the build-up phase at this time, it will be very nice. Once you hit 10%, it stabilises. Thereafter, it will move in tandem with global movements. When the global movement goes down, it will go down. That is what is the worry, not the build-up stage...is all very fine. I am eating one piece of cake this month, another piece of cake next month, after 12 months I will get diabetes," he said.
India's inclusion in the JP Morgan index will be staggered over 10 months. A similar exercise will start with the Bloomberg local currency emerging markets index from Jan 31. Since the inclusion was first announced in September, FPIs have bought around $12 bln worth of gilts under the fully accessible route that has no limits on foreign investment. Analysts expect around $30 bln of inflows from index-related purchases alone in the current fiscal year. End
Edited by Avishek Dutta
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