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Informist, Wednesday, Jul 31, 2024

 

--Fin min source: Aim to up short-term gilts' liquidity via FPI curb

--CONTEXT: RBI excluded 14-, 30-yr gilts from fully accessible route

--Fin min source: Don't see volatility in short-term gilts on RBI move

--Fin min source: Saw muted FPI interest in 14-year, 30-year gilts

--Fin min source: Saw more FPI interest in 5-year, 10-year gilts

 

By Krity Ambey

 

NEW DELHI - The government aims to boost liquidity in dated securities maturing in up to 10 years by restricting foreign investment in 14-year and 30-year gilts, a senior finance ministry official said. The Reserve Bank of India notified on Monday that new issuances of 14-year and 30-year bonds will no longer be eligible under the Fully Accessible Route, which has no limits for investment by foreign portfolio investors.

 

"One objective of excluding 14- and 30-year securities is to focus foreign portfolio investors' demand in securities up to 10 years and thereby improve liquidity in this segment," the official told Informist. "Going forward, securities of 5-, 7-, and 10-years are planned to be kept under the Fully Accessible Route."

 

The RBI's move comes a month after inclusion of Indian gilts began in JP Morgan's Government Bond Index – Emerging Markets on Jun 28, which is set to increase the foreign investors' exposure to India's government securities. Only bonds under the Fully Accessible Route are eligible for inclusion in global bond indices. 

 

Government bonds with 5-year and 10-year maturities have received the most attention from foreign investors, the official said. The 14- and 30-year gilts that have already been issued will continue to be under the Fully Accessible Route without limits for foreign investment in the secondary market, as per the RBI notification.

 

"The (foreign) investments in 14- and 30-year securities have been rather muted," the official said. The old 10-year benchmark 7.18%, 2033 bond has received the most inflows, with FPI holdings of the bond at 232 bln rupees, or 11.5% of its outstanding.

 

"Total amount of such 5-, 7-, 10-, 14-, and 30-year securities is 41 trln rupees. The foreign investment in those is 2 trln rupees only as of Jul 26," the official said. "As a result, a large stock of securities remains available for foreign investment through the secondary market."

 

Foreign investors can invest in newly issued 14-year and 30-year government bonds under the medium-term framework that allows FPIs to hold 6% of the total outstanding stock of government bonds. There has been FPI investment of less than 2% under the medium term framework, the official said. "So there is adequate space in this category." 

 

When asked if the RBI's move can increase volatility in short-term securities, the official said, "as a large stock of securities continue to be available, volatility is not expected."

 

JP Morgan added 29 gilts under the Fully Accessible Route for inclusion in the Government Bond Index – Emerging Markets suite. The inclusion in this index will be staggered over 10 months till March. A similar exercise will start with Bloomberg's local currency emerging markets index from Jan 31.

 

Even the broader gilt market is expected to remain without too much volatility after the inclusion of government bonds in the global indices, the official said. "The market has adequate liquidity to absorb any volatility arising from (foreign) inflows." Analysts expect around $30 bln worth of FPI investment in government bonds on account of the inclusion, with around $13 bln already invested since September-end.  End

 

US$1 = 83.73 rupees

 

Edited by Vandana Hingorani

 

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