As of January 18, foreign funds owned 21.2%, or ₹10,398 crore worth, of outstanding stock of a government bond maturing in 2028, Clearing Corporation of India data showed. The bond, which has an outstanding stock of ₹49,000 crore, is among the most liquid in the secondary market.
The 2028 bond, which bears a coupon – or rate of interest paid to investors – of 7.37%, was issued by the government on October 23, 2023.
A month before that, JP Morgan announced the inclusion of Indian government bonds in an emerging market bond index, a move that is estimated to bring in foreign flows in the region of $20 billion to $40 billion. Only bonds which are within the central bank’s FAR category are eligible for index inclusion.
“There is a preference for the 2028 bond because it was a five-year bond whose duration now fits in well with FPIs. Within the 32 FAR bonds, most of the international funds would be looking for four-to-seven-year bonds for their duration requirements,” said Vikas Goel, CEO of PNB Gilts.
“The demand that is coming up until now is from the active players. They are anticipating demand to come in from the passive players as index inclusion draws closer and they will then sell these bonds to them,” he said.
Before the central bank introduced the FAR category of Gsecs in 2020, it had kept a close watch on limits for foreign investment in government bonds to shield the market from potential volatility. Government bond yields are the pricing benchmarks for corporate borrowing and a driver of equity valuations.Over the past few months, however, RBI Governor Shaktikanta Das has said on multiple occasions that while global bond index inclusion may be a double-edged sword, the Indian central bank has an established track record of dealing with both large-scale inflows and outflows of overseas funds.
Recent Rush
Incidentally, while the foreign investment in the FAR category has shot up, that in the overall general category for central government securities is currently only at 24.5% of the upper limit of ₹2.7 lakh crore. The RBI caps FPI investment in these papers at 6% of outstanding stock.
Prior to JP Morgan’s announcement of its index recast, on September 1, the highest FPI holding of any FAR Gsec was at a mere 8.8% of outstanding stock, a statistic which displays the extent of eagerness that foreign players have showed for fully accessible government bonds since the long-awaited decision to include India’s bonds in a global index.
The overall investment in the FAR category now stands at a huge ₹1.39 lakh crore versus ₹94,960 crore on September 1.
