India to Cut Foreign Investment Curbs on Popular Bond Tenors

Vijay Balsana

06 Aug, 2024

India shields its bonds from foreign ownership, which restricts the freedom to buy freshly issued Indian government bonds with 14-year and 30-year tenors. The Reserve Bank of India’s (RBI) decision facilitates the removal of foreign investment curbs on popular bond tenors, boosting liquidity and investors’ confidence. Further, a fund manager stated that the RBI’s decision promoted uncertainty in the Indian bond market and ensured a re-assessment of investment strategies.

What are Popular Bond Tenors?

Popular bond tenors refer to the specific maturities of widely traded government and corporate bonds that investors commonly hold. Changes in these maturities can affect how accessible these bonds are to foreign investors. Popular bond tenors are the lengths of time remaining until a bond’s maturity date. Here are some examples of popular bonds with varying durations:

• 1 to 3 years, i.e., short-term popular bond tenor;
• 4 to 7 years, i.e., medium-term popular bond tenor;
• 8+ years, i.e., long-term popular bond tenor.

Features of Popular Bond Tenors

There are several significant features of popular bond tenors. Some of the known ones are mentioned below-

• Fixed Interest Rates: Bond tenors offer predictable returns over the term of the bond.
• Liquidity: These tenors are actively traded. It is easy to buy and sell.
• Varied Maturities- These tenors are short, medium, and long-term options to suit a wide range of investment strategies.
• Regular Income: It is concerned with periodic interest payments. It is sometimes semi-annual or annual.

Historical Perspective of India’s Bond Market

The Indian bond market faced different foreign investment restrictions, such as limiting the amount of allowed foreign investment, specific rules regarding the types of bonds, etc. The aim of putting restrictions in place ensures the management of capital inflows and safeguards the financial system’s stability.

Removal of Foreign Investment Restrictions from Popular Bond Tenors

The Reserve Bank of India (RBI) has rightly decided that Foreign Portfolio Investor i.e., FPI under the fully assessable route (FAR) would no longer have access to new Indian government bonds with 14 or 30-year tenors. The decision of RBI aligns with broader economic reforms and goals that integrate India and the global financial market.

Moreover, the policy mainly removes the investment restrictions (i.e., curbs) on certain popular bond tenors, allowing foreign investors to invest in a broader range of bond maturities.

Implications of Removal of Foreign Investment Curbs

The following are the implications of foreign investment curbs impacting the liquidity in the bond market:

1. Re-Imposition of Foreign Investment Limits

India re-imposes foreign investment limits on some new government securities/bonds issued for a 5-year, 7-year, or 10-year period.

2. Exclusion of Securities

Exclusion of 14-year and 30-year securities for mainly focusing on the demand of FPI in securities up to 10 years. Also, it improves liquidity by allowing foreign investors wider access to bonds.

3. Enhanced Investor’s Confidence

The removal of foreign investment curbs enhances the confidence of foreign investors through a friendly approach for generating greater investment flows and contributing towards the good health of the bond market.

4. Boosts Capital Inflow

Removing restrictions on foreign investments increases capital inflow into the Indian bond market, helping stabilize the Indian currency.

5. Diversification of Investor’s Base

A wider range of bond tenors assists in the diversification of investors’ bonds by allowing foreign investment after restrictions are curtailed. This reduces reliance on domestic investors.

Conclusion

India lifting investment curbs on popular bond tenors is considered a strategic move of the RBI, which mainly provides for the integration of the bond market with the global financial market. The changing reforms and policies in Indian foreign investment mark a critical shift towards an attractive and stable bond market. However, removing these investment restrictions maintains financial stability, control over currency volatility, and management of capital inflow to avoid sudden market shocks.

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