New foreign investment category first step towards inclusion of INR bonds in global benchmarks, says DBS report

By: |
March 31, 2020 4:41 PM

The Reserve Bank on Monday opened certain specified categories of government securities (G-Secs) for non-resident investors as part of an initiative to deepen the bond market.

"This together with around Rs 4.3 trillion of existing securities cumulatively make USD 70 billion worth securities eligible," DBS Bank economist Radhika Rao said in a note. “This together with around Rs 4.3 trillion of existing securities cumulatively make USD 70 billion worth securities eligible,” DBS Bank economist Radhika Rao said in a note.

The unrestricted access of foreign investors to select Indian bonds is a first step towards facilitating inclusion of INR bonds in global bond benchmarks, says a DBS report. The Reserve Bank on Monday opened certain specified categories of government securities (G-Secs) for non-resident investors as part of an initiative to deepen the bond market.

RBI in a notification on Monday said that a separate route namely, Fully Accessible Route (FAR) for investment by non-residents in securities issued by the Government of India has been notified. “Assuming 15 per cent of Rs 7.8 trillion gross borrowings for FY21 is considered under the FAR, eligible securities will amount to Rs 1.2 trillion (around USD 15 billion).

“This together with around Rs 4.3 trillion of existing securities cumulatively make USD 70 billion worth securities eligible,” DBS Bank economist Radhika Rao said in a note. Rao further noted that “if inclusion into global indices is considered, this might translate into a potential weight of 4-6 per cent on the JPM GBI-EM Index and less than 1 per cent on the Bloomberg Global aggregate bond index.”

According to Rao, the plan to free up part of the GSec issuance to full FPI participation was announced in February’s Budget, marking a first step towards facilitating inclusion of INR bonds in global bond benchmarks. Finance Minister Nirmala Sitharaman in the Budget for 2020-21, had announced that “certain specified categories of Government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well.”

In addition, all new issuances of Government securities of 5-year, 10-year and 30-year tenors from the financial year 2020-21 will be eligible for investment under the FAR as ‘specified securities’, RBI said.

“Scope of incremental flows hinge on the broader risk-environment, which at this juncture is tepid, with less than 60 per cent of the existing limit used up. If and when bonds are included in global benchmarks (also factoring in the lead time for due processes), the economy will able to draw in less volatile and long-term focused funds,” Rao added.

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