Centre mulls raising FPIs’ debt limit to 10%; announcement likely in Budget

India seeks entry into global bond index

The Centre is considering increasing the government bond investment limit of foreign portfolio investors (FPIs) to at least 10 per cent of the outstanding, from 6 per cent now, with an aim to incorporate local bonds into global bond indices, according to sources close to the matter. The decision may be announced in the upcoming Budget.

FPIs, including long-term investors, can currently invest up to Rs 3.61 trillion in government bonds, of which they invested Rs 2.16 trillion as of December 12. However, the share allotted to FPIs is inadequate to be included in global bond indices such as those by JP Morgan and Bloomberg-Barclays.

The finance ministry, according to sources, has written to JPMorgan and Bloomberg to advance such inclusion, sources said.

Typically, to be eligible for these indices, the criterion is to offer 15-20 per cent of the outstanding stock to foreign investors and to ensure there is adequate liquidity, as well as choices of derivatives available to hedge the investment risk.

Sources said India’s plan might include a possible sovereign bond, but the Reserve Bank of India (RBI) is opposed to it as the central bank doesn’t want to face a currency risk. However, inclusion in the index itself becomes quasi-sovereign bonds as any investor can invest and transact in those bonds.

The RBI is also not open to more than doubling the investment limit to 15 per cent of the outstanding, which is considered to be a prerequisite for the inclusion. But the central bank wants the government to go slow and first check how the currency risk is covered from the issuer perspective, before increasing the limits further. Hence, any further increase could take another year or two after the 10 per cent limit is declared, possibly in the Union Budget in February.

Financial information firm Bloomberg LP is helping the finance ministry in this respect, and international bodies such as the Asia Securities Industry & Financial Markets Association (ASIFMA) are chalking out how the currency risk, tax issues, and other roadblocks can be overcome. PwC is helping ASIFMA in India in this regard, said sources.

When a sovereign bond is included in a global index, the inflow in that country increases manifold.

“Inclusion in global benchmark indices could mean $50 billion to $125 billion of new investment in India’s economy, ensuring a more stable path to growth,” said Abhishek Gupta, Bloomberg’s India Economist.

The government has to always follow a strict set of rules to remain in the index, including ensuring that there is enough liquidity in the underlying bonds so that it can freely trade in the market. Even as the index provider ensures adequate hedging instruments against the investment, the domestic market also needed to have a robust derivatives market. The RBI itself is trying to bring global derivatives trades in rupee onshore at the IFSC.

In his recent visit to the US, Prime Minister Narendra Modi and Michael Bloomberg announced a partnership to strengthen international investment in India, with an aim to increase India’s gross domestic product (GDP) to $5 trillion by 2025. To do this, India plans to invest $1.5 trillion in infrastructure. For this, the government needs to tap into global funds, as bad-debt-scarred local banks increasingly become risk averse.

Investors can leverage Bloomberg’s expertise and connectivity to strengthen the development of International Financial Services Centre (IFSC), while Bloomberg will help the government get into global bond indices, it was announced in September. And global investors are more than willing to provide that fund.

A survey by Bloomberg of 65 top international asset and fund managers globally, conducted from July to September, and released in December, showed that 92 per cent of the participants were willing to increase investment in India if access was easier. The investors saw opportunities in India’s bond market, but cited capital controls, low market liquidity, and lack of electronic access as key barriers.

While India has for years dilly-dallied on getting into a global bond index, considering the demand for government bonds remained robust among domestic investors, the latest inclusion of China in the JPMorgan bond index has piqued India’s interest. JPMorgan will add nine Chinese government bonds, with maturities between five and 10 years, in 2020.