RBI to Allow Foreign Investment in Govt Securities
As also mentioned in the Union Budget, RBI has operationalised the investment by foreign nationals in select Government Securities (G-Sec). At a time when global economy has plunged into recession, this move has the capacity to mitigate the financial impact of Coronavirus. Complete Coverage: Coronavirus
Crux of the Matter
RBI announced that it is operationalising the sale of selected G-Sec from April 1 through a separate channel called ‘Fully Accessible Route’ (FAR). The Central Bank has announced that 5-year, 10-year, and 30-year bonds that are issued from Fiscal 2020-21 will be eligible for foreign investment. RBI has also removed any ceilings on investment. The following existing securities will also be opened up for foreign investment from April 1st:
7.72% Government Security 2049
7.26% Government Security 2029
6.45% Government Security 2029
7.32% Government Security 2024
6.18% Government Security 2024
Does This Come at a Right Time? As RBI invites foreign investors, Indian G-Sec Bonds enter into global bond indices. The outstanding amount of the existing securities is around Rs. 4.2 lakh crores, which could gain Indian bonds a weight of 2.5% on global bond indices. Although foreign investors have currently sold Indian bonds in order to cash up dollars, there can be a good amount of buying in the coming months. This move also comes at a time when India is fighting the Coronavirus and needs $22.6 billion (Rs. 1.7 trillion) to fund the stimulus package.
Of the total outstanding value of G-Sec of India, Rs. 60 trillion, foreigners only hold 2.7% of it. RBI has kept the cap for maximum foreign ownership at 6% of the total outstanding debt. Therefore, there is a lot of potential for India’s bond market to bring foreign investments in the country once the markets are rebounding.
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on. Its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2017, the size of the worldwide bond market (total debt outstanding) was estimated at $100.13 trillion.
Participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rises, since new issues pay a lower yield. This is the fundamental concept of bond market volatility—changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country’s monetary policy and bond market volatility is a response to expected monetary policy and economic changes. More Info