New Delhi, July 30, 2024: India has enacted new measures to limit foreign ownership of its government bonds, reflecting concerns over the significant influx of foreign capital following the inclusion of Indian debt in a prominent global index.
Effective immediately, the Reserve Bank of India (RBI) announced that overseas investors will no longer be able to freely purchase newly issued Indian government bonds with 14-year and 30-year maturities. The central bank did not provide a specific reason for this sudden policy shift.
This move follows JPMorgan Chase & Co.’s decision last month to include Indian government securities in its key emerging market index. The inclusion marked a milestone, enhancing global access to India’s high-performing but tightly controlled debt market, which has one of the lowest foreign ownership ratios among emerging markets.
Neeraj Gambhir, Group Executive for Treasury, Markets & Wholesale Banking Products at Axis Bank Ltd., commented, “It’s a bit of a surprise announcement. It’s also not very clear why the bank has chosen to exclude those two securities. However, given the large pool of securities available to foreigners, it shouldn’t have a significant impact on index-related flows.”
Bloomberg reported last week that authorities might revise the rules for issuing such securities to mitigate volatile capital flows and reduce market instability. A spokeswoman for JPMorgan declined to comment on whether the new directive would affect the composition of its index, and the RBI did not immediately respond to inquiries.
India’s local-currency bonds have been among the top performers in emerging Asia this year, delivering an 8.1% return to investors, according to Bloomberg data. Despite the new restrictions, the yield on existing 30-year Indian government bonds remained stable on Tuesday.
Since India’s index inclusion announcement in September, global funds have invested over $12 billion in the country’s bonds. The RBI has been purchasing these incoming dollars to prevent excessive appreciation of the rupee, resulting in a record high for its foreign exchange reserves.
Goldman Sachs Group Inc. and other analysts have projected that India’s inclusion in the index could attract up to $40 billion in foreign capital, with the country’s weight in the index expected to gradually increase to 10%.
In response to the Asian financial crisis, India began opening its sovereign bond market to foreign investors in 2020. However, unlike China, which made several adjustments to its debt market before its inclusion in JPMorgan’s index, India has resisted tax reforms that would facilitate trading on international platforms like Euroclear.
Shamaila Khan, Head of Fixed Income for Emerging Markets and Asia Pacific at UBS Asset Management, noted, “This move indicates the government’s continued reluctance to encourage significant foreign bond inflows.”
Currently, there are over 30 foreign accessible government securities, as reported by The Clearing Corp. of India.
