Govt, RBI turn cautious over unrestricted foreign fund flows into longer term bonds
- The government and the Reserve Bank of India (RBI) have turned cautious and excluded long-term government bonds with 14-year and 30-year tenors from the Fully Accessible Route (FAR).
Highlights:
- The decision was taken earlier this week amid speculation about more unrestricted inflows by foreign portfolio investors (FPIs) which can trigger uncertainties and risks in the future.
- As the inclusion of Indian bonds will be staggered into the GBI-EM Global Diversified Index (GBI-EM GD) over 10 months, official sources don’t rule out more FPI flow into Indian long-term bonds through FAR.
- The inclusion of government securities (G-secs) in indices which will be spread over 10 months, i.e., till March 31, 2025, is likely to bring nearly $20-25 billion into the country, according to various estimates.
- While higher inflows will help India manage its external finances and boost the foreign exchange reserves and the rupee, the Reserve Bank will have to use the instruments in its armoury to check the resultant inflationary pressures.
- The principles of prudential debt management indicate that this has to be watched over because there has been a history of dollar drawdown in some countries during global crises.
- The FAR route was opened up in March 2020. This scheme is supposed to operate along with the two existing routes the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).
- Considered as hot money, FPI flows had created fluctuations in the market in the past.
- While higher inflows will boost the rupee, inflation is likely to come under pressure.
- When the RBI mops up dollars from the market, it will have to release an equivalent amount in the rupees, putting pressure on inflation.
- JP Morgan said only G-Secs designated under the Fully Accessible Route are index eligible.
- As per the index inclusion criteria, eligible instruments are required to have notional outstanding above $1 billion (equivalent) and at least 2.5 years remaining maturity.
- The government is optimistic about economic growth with the Economic Survey forecasting a 6.5-7 per cent growth and stock markets are in the middle of a bull run.
Prelims Takeaway
- FPI
- FAR