Measures to improve flows into corporate bonds are welcome
| Photo Credit:
SANJAY SHARMA
Foreign portfolio inflows into Indian debt securities hit record highs in 2024. A favourable interest rate spread, stable rupee and inclusion of Indian bonds in global bond indices enthused foreign investors. While FPI flows into Indian debt continued in the first quarter of 2025, the tide turned in April and May.
The tariff bazooka fired by the Trump administration in the first week of April shook up global markets. As a fallout, there was a net FPI outflow of ₹31,480 crore in April and May (so far). The bedlam is unlikely to abate soon. Since forex and bond markets are likely to witness volatility, it is good that the Securities and Exchange Board of India (SEBI) and Reserve Bank of India are taking measures to improve inflows into government and corporate bonds. Foreign investors were only allowed to invest in corporate bonds with a residual maturity of more than one year; they were not allowed to invest more than 50 per cent of the total issue size. The RBI has withdrawn both these rules through a circular issued last week. With most of the issue sizes being less than ₹200 crore, the concentration clause was a major impediment to attracting foreign investors. Allowing FPI investment in securities maturing in less than one year will give FPIs more options to invest.
The stock market regulator is also moving in the same direction, trying to improve FPI inflows into Indian government bonds. It had recently issued a consultation paper seeking to relax the registration and compliance process for FPI investments in Indian government bonds through the voluntary retention route and fully automated route. These routes allow FPIs to invest in government bonds without any concentration limits. The sharp increase in the FPI holding of government bonds through the VRR and FAR route, with such holdings exceeding ₹5 lakh crore as of March 2025, signals that fewer restrictions can help garner more FPI inflows into G-secs. The suggestions in the SEBI paper, including extending the interval for KYC updation, removing the requirement of providing details about the investor group of the FPI and removal of restrictions on NRI contribution in the corpus of these FPIs, appear well thought out. Since these FPIs will be investing only in government bonds and not equities or corporate bonds, the relaxations are unlikely to increase risk.
Creating ample demand for government securities is important to keep the G-sec yields in check amidst rising debt. While the inclusion of Indian government bonds in JP Morgan Global EM Bond Index and Bloomberg EM Local Currency Government Index resulted in strong FPI inflows since the second half of 2024, these flows are beginning to taper. This is borne out by the fact that FPIs hold just 2.81 per cent of the outstanding stock of government securities, against a ceiling of 6 per cent. Similarly, in corporate bonds, FPIs have utilised only 14 per cent of their available limit. Relaxing some of the relevant rules could help improve inflows.
Published on May 16, 2025