Foreign debt investment reforms will help ‘Make in India’

In her February 1 Budget speech, finance minister Nirmala Sitharaman had proposed that certain categories of government securities (G-Secs) would be opened fully for non-resident investors. “The limit for FPI (foreign portfolio investors) in corporate bonds, currently at 9% of outstanding stock, will be increased to 15% of the outstanding stock of corporate bonds,” Sitharaman had said.

Almost two months later, on March 30, the Reserve Bank of India (RBI), as part of its annual exercise of revising the investment limits for the ensuing fiscal, notified that the central bank in consultation with the central government had introduced a separate route called the fully accessible route (FAR) for investment by non-residents in securities issued by the government of India.

Separately, on the same day, the RBI also intimated the enhancement of FPI investment limits in corporate bonds as proposed by Sitharaman. “The limit for FPI investment in corporate bonds is increased to 15% of outstanding stock for FY21,” the RBI notified.

And, from ₹317,000 crore at the end of FY20, the FPI limit was increased by ₹112,244 crore for the first half of FY21 (April 2020 to September 2020 – H1FY21) to ₹429,244 crore. And, for the second half of FY21 (October 2020 to March 2021–H2FY21), the increased limit stood at ₹541,488 crore. In percentage terms, the half yearly at the end of September 2020 was 35.41% as compared to March 2020, and the incremental growth in March 2021 over September 2020 was 26.15%.

On an annual basis, the FPI investment limit in corporate bonds at the end of March 2021, at ₹541,488 crore is growth of ₹224,488 crore, or 70.82% over ₹317,000 crore at the end of March 2020. It is noteworthy, that at the end of March 2019, the same limit stood at ₹289,100 crore. The increase of ₹27,900 crore was an annual growth of just 9.65% then compared to the current 70.82% increase.

On the G-Secs front, RBI separately notified five specific series of G-Secs, two maturing in 2024 and three in 2029, as eligible securities for FAR. “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’,” the central bank said. “The Reserve Bank may add new tenors or change the tenors of new securities to be designated as ‘specified securities’ from time to time.”

According to London-based Jan Dehn, head of research at Ashmore Group, which has nearly $100 billion worth of assets under management, after years of to-ing and fro-ing on the issue of opening its bond markets to foreign investors, the Indian government finally took the step to allow foreign investors unfettered access to a series of government bonds.

“This decision should in turn pave the way for Indian government bonds to enter all the major global fixed income benchmark indices,” Dehn penned in his weekly noted dated April 6. In his opinion, this is an important development, because index inclusions grant India access to a more stable institutional investor base. “Index inclusion should, over time, lower the term structure of interest rates, which in turn will aid economic activity and broaden credit markets in the country,” Dehn added.

Additionally, Dehn said that index inclusion would also extend Prime Minister Narendra Modi’s “Make in India” vision to the world of finance. In practice, access to Indian bonds worth over $57 billion will be through FAR. “The bonds should be eligible for inclusion in the Bloomberg-Barclays Global Aggregate Index (BBGA), JP Morgan’s GBI-EM GC index and presumably also FTSE’s WGBI,” Dehn opined. “Index inclusion is likely to take place over the next 24 months.”

Clearly, while the development has long-term benefits, in the current scenario when the government is in added need of resources, the new set of debt buyers would help RBI to raise incremental resources, without the yields shooting higher. And, that without the need of the banking system to come forward to subscribe to the debt papers. And, for the new buyers, the relatively higher yields which Indian paper could offer would be attractive enough to invest.

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