RBI Opens Up Key Government Bonds To Full Foreign Investment

The Reserve Bank of India has decided to open up key government securities to full foreign investment in an attempt to find a place in global bond indices.

The RBI’s announcement follows an intent articulated in the Union Budget, where Finance Minister Nirmala Sitharaman said that certain specified securities would be opened up fully to foreign investors. To operationalise this, the RBI has opened a new window called the ‘Fully Accessible Route’

“The Reserve Bank shall notify the government securities that shall be eligible for investment under the fully accessible route. These specified securities will continue to be eligible for investment by residents,” the central bank said in a release.

As a start, the central bank has picked some of the more liquid and benchmark securities and said that the 5-year, 10-year and 30-year bonds issued from financial year 2020-21 onwards will be eligible for full foreign investment.

Existing securities put under the window include:

• 6.18 percent government security 2024
• 7.32 percent government security 2024
• 6.45 percent government security 2029
• 7.26 percent government security 2029
• 7.72 percent government security 2049

Aiming At The Global Bond Indices

The opening up of specified securities fully to foreign investors is aimed at an eventual entry into global bond indices. These indices typically seek that securities included should not have any restrictions.

As such, the RBI has maintained the overall foreign investment limit in government bonds at 6.5 percent of the outstanding amount. Within that limit, it has chosen to remove ownership restrictions on individual securities.

According to Rahul Bajoria, chief India economist at Barclays, the outstanding amount under the five specified securities is about Rs 4.2 lakh crore. This could get India a weightage of roughly 2.5 percent in the global bond indices, Bajoria said.

If one assumes that each year, 20 percent of the gross borrowings are done via the 5-year, 10-year and 30-year securities, you could roughly add another Rs 2 lakh crore each year to the amount where foreign investment is fully permitted. If this experiment works out, the RBI may open up more securities as well, Bajoria said.

At present, the overall cap on foreign investment in government bonds will not be a constraint. Less than 60 percent of the limit has been used up. However, you could possibly attract new money over the medium term once the environment improves, Bajoria said.

Jayesh Mehta, country treasurer of Bank of America, said the RBI’s decision brings to a close a process that began in 2013. Since then, the RBI has been keen to get India listed on global bond indices but has been cautious about the opening up of limits sought by these indices. The RBI has offered a good number of securities to start with, which should allow at least one of the large bond indices to include India over the next few months, Mehta said.

Of the three main indices, the Bloomberg-Barclays Emerging Market Bond Index has the largest amount of money tagged to it, estimated at about $2 trillion. The other two indices are the FTSE Russell Government World Government Bond Index and the JPMorgan Government Bond Index-Emerging Markets.

Depending on which index India targets and the weightage Indian bonds get, bankers expect that a pool of close to $15-20 billion will become eligible to flow into India. This would be ‘non-discretionary’ money that would flow in in-line with the allocation to the wider emerging market universe.

A number of foreign investors who had so far not invested in India because it wasn’t part of their mandate will now look to invest. The breadth of investors will widen, said Mehta. “For the time-being, the sell off from global investors may continue, but we could see good flows a few months down the line.”

Increased Limit For Corporate Bonds

Separately, the RBI also increased the foreign investment limit in corporate bonds to 15 percent of the outstanding amount. This, too, was announced in the bugdet and has now been operationalised by the RBI.

Following the increase, the revised limit for investment in corporate bonds stands at Rs 4.29 lakh crore in the first half of FY21 and at Rs 5.41 lakh crore in the second half of the year.

At present, FPI holdings in corporate debt stand at only Rs 1.7 lakh crore, with just over 54 percent of the available limit used up.