In March 2020, the RBI introduced a new category for foreign investment in central government bonds – the Fully Accessible Category (FAR). Sovereign bonds falling in this category are fully open for investment without restrictions. Meanwhile, in a potential source of ambiguity, the RBI’s current cap for foreign investment in central government bonds is 6% of the outstanding stock of securities. This limit was specified in an April 2022 notification.
While the FAR category did not attract large foreign flows for three years, overseas players have poured almost $10 billion into the FAR bracket since JP Morgan said in September 2023 that Indian bonds would be included on its emerging market index from June of this year.
With Bloomberg also having announced inclusion of Indian bonds in one of its indices starting 2025 and other index managers likely to do so going ahead, clarity on what happens to the 6% limit may be required.
“Once the FAR securities were introduced, the concept of the limit became redundant. Obviously, it was a decision taken in consultation by the government and the RBI. The idea must be that they can always calibrate the issuance of FAR bonds at a later date if needed. That must be the thought process behind the introduction of FAR securities,” said A Prasanna, head of research at ICICI Securities Primary Dealership.
Sources aware of the developments said that over the past year, the RBI has had held internal discussions on the matter of the limit, with the central bank likely at some point to clarify a new position.An email sent to the RBI seeking comment on the matter did not receive a response till the time of publication.As on March 13, combined FPI investment in the general category, the long-term category and the FAR category was at Rs 2.5 lakh crore, Clearing Corporation of India data showed. The latest position for the total outstanding stock of central government bonds is Rs 102.65 lakh crore, RBI data showed.
Citigroup’s CEO recently projected inflows worth $40 billion from index inclusion, while HSBC estimated flows worth $35-45 billion over 15 months. Bank of America’s head of India trading predicted flows worth $32-35 billion.
In the 11 years since signs of a tighter US monetary policy sparked a ‘taper tantrum’ of foreign outflows and wreaked havoc on the rupee and the domestic bond market, the RBI has kept a very close eye on overseas investment in government bonds.
Over the last couple of years, the RBI has adroitly managed large-scale overseas fund outflows in the wake of aggressive US rate hikes, with the central bank’s formidable arsenal of foreign exchange reserves ensuring that the rupee remains relatively unscathed amongst its peer currencies.