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Informist, Monday, Jul 29, 2024

 

--RBI: To exclude all new 14-, 30-yr gilts from fully accessible route

--RBI: Notified 14-, 30-yr gilts remain under fully accessible route
--RBI: FPIs can invest in new 14-, 30-yr gilts under given limits
--RBI: FPI can invest in 14-, 30-yr gilts in voluntary retention route

--CONTEXT: RBI FY25 FPI limit for gilt holdings at 6% of outstanding

 

NEW DELHI – The Reserve Bank of India today notified that new issuances of 14-year and 30-year government bonds will no longer be eligible under the Fully Accessible Route, which has no limits for investment by foreign portfolio investors.

 

"Consequently, future issuances of Government Securities in these tenors shall not be available for investment under the Fully Accessible Route," the notification said. The decision was taken in consultation with the government.

 

According to its borrowing calendar for Apr-Sep, the government is due to issue a 30-year bond this Friday, and may issue a new 30-year bond today as the on-the-run 7.30%, 2053 bond's outstanding has increased to 1.95 trln rupees, the third highest for any gilt issued so far.

 

The government could restrict the addition of new bonds to the fully accessible route, if needed, to keep a check on foreign fund inflows after India's inclusion in global bond indices, Finance Secretary T.V. Somanathan had exclusively told Informist last week.

 

The 14- and 30-year gilts which have already been notified under the fully accessible route will remain without limits for foreign investment in the secondary market, the RBI notification said. This is the first time the central bank has taken bonds of certain maturities out of the fully accessible route since it introduced the avenue for a handful of gilts in 2020. The 15-year bond, as well as the 40- and 50-year government securities, have not been added to the fully accessible route among gilts in the ongoing borrowing calendar. The government replaced the 14-year bond with the 15-year bond in its Apr-Sep borrowing calendar. 

 

FPI investment in new 14- and 30-year bonds can continue using the voluntary retention route and the medium-term framework for foreign investment, the RBI said. Current norms for 2024-25 (Apr-Mar) allow FPIs to hold 6% of a government bond's outstanding limit. Only 10 of the 38 bonds under the fully accessible route have FPI holdings of over 6% of their outstanding.

 

Some of India's fully accessible route bonds were included in JP Morgan's Government Bond Index – Emerging Markets on Jun 28. All such bonds are scheduled to be included in Bloomberg's emerging market local currency index over 10 months starting Jan 31. These inclusions are expected to attract around $30 bln in total foreign inflows into gilts, of which around $13 bln has already materialised since September. However, FPIs have bought only around 6 bln rupees of the 14-year benchmark 7.18%, 2037 gilt and 727.1 mln rupees of the 7.30%, 2053 gilt in July, according to data from Clearing Corp of India until Friday.  More

 

"It's a hit on the sentiment more than anything else. The reason to introduce this now is a surprise, because there was no real flow or volatility," a treasury official at a state-owned bank said. "Though there have been some reports on it, our sense was that it was still a long time away. This is very proactive from the Reserve Bank."

 

The government likely took this measure to protect returns for domestic long-term investors such as life insurers and pension funds, bonds dealers said. Bond yields are already falling, with the 30-year yield down 37 basis points this year to 7.04% today. There was potential for increasing competition and demand in that segment from foreign investors tracking the bond indices, which will be skewed to heavily-issued long-duration papers, dealers said.

 

The decision is likely to add to volatility in the government bond market as FPI purchases will be concentrated in a lower number of securities, dealers said. Meanwhile, a mitigation in FPI demand for bonds maturing above 10 years would also translate to a steeper yield curve – long-term bond yields rise while those of shorter tenures fall. However, considering how lacklustre FPI demand for these securities was, the impact on gilt yields may be limited.

 

In case any volatility springs up in these tenures due to the index inclusion after India secures the maximum 10% on the indices, as scheduled by end of October 2025, the RBI likely did not have any significant measures to counteract it, dealers said. Its stock of bonds to sell in the open market to match investor demand was likely concentrated in tenures maturing up to seven years, which may explain why the central bank is comfortable with short-term bonds attracting a large percentage of the fresh FPI flow.  End

 

Reported by Aaryan Khanna

Edited by Ashish Shirke

 

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