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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.
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:
There are several significant features of popular bond tenors. Some of the known ones are mentioned below-
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.
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.
The following are the implications of foreign investment curbs impacting the liquidity in the bond market:
India re-imposes foreign investment limits on some new government securities/bonds issued for a 5-year, 7-year, or 10-year period.
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.
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.
Removing restrictions on foreign investments increases capital inflow into the Indian bond market, helping stabilize the Indian currency.
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.
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.
Currently, the Indian government has removed the foreign investment restrictions from popular bond tenors to attract more foreign investments.
The Foreign Investment Portfolio Board (FIPB) under the Department of Economic Affairs, Ministry of Finance, was the agency established to boost foreign investment in India.
Yes, bonds that are convertible into equity shares are covered under India's FDI policy.
Singapore is India's largest foreign investor since FY 2018-19.
Mauritius, Singapore, the USA, the Netherlands, and Japan are India's top five FDI countries with FDI inflows.
Popular bond tenors are specific maturities of widely traded government and corporate bonds held by investors.
The removal of restrictions on foreign investment has implications for the re-imposition of foreign investment limits, exclusion of securities, enhanced investor confidence, boosted capital inflow, and diversification of investor base.
Removing foreign investment restrictions on certain popular bond tenors ensures foreign investors invest in a broader range of bond maturities.
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