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Wednesday, December 01, 2021

Framework finalised: G-secs to ‘soon’ join global bond indices

The Finance Ministry and the Reserve Bank of India (RBI) have worked out most requirements for overseas trading and settlement of Indian bonds, a senior government official said.

Written by Sunny Verma , Sandeep Singh | New Delhi |
November 8, 2021 3:57:09 am
Sources said the move took time as the government wanted to be fully prepared, as after an entry into a global bond index any pullout is not possible without a rating downgrade to junk status.

The government has finalised most of the background infrastructure and sorted out the supply-side issues to prepare India’s entry into global bond indices. The Finance Ministry and the Reserve Bank of India (RBI) have worked out most requirements for overseas trading and settlement of Indian bonds, a senior government official said. The move is expected to attract foreign inflows in the debt market, help the government is its market borrowing programme and keep a check on yields.

“We are going to be recipient of overseas capital for a very, very long time. India is ready for inclusion in the global bond index. JP Morgan (the index provider), they also believe that India is a desirable candidate…the issue of capital gain exemption has also been addressed. Index entry should happen anytime soon, even before the Budget (in February),” the official said.

Explained

In the works for many years now

Sources said the move took time as the government wanted to be fully prepared, as after an entry into a global bond index any pullout is not possible without a rating downgrade to junk status.

“Fear of volatility generated by trading among the passive global bond funds and no possibility of exit in case the need arises have led to delays in this policy move. But given our large foreign exchange reserves of around $640 billion, we believe we can withstand any volatility,” the official said.

The plan to list a set of government securities in global bond indices has been in the works for many years now. The then Finance Minister Arun Jaitley, in the Union Budget 2014-15, proposed allowing international settlement of Indian debt securities, as it was expected to result in a reduction in bond yields and an increase in liquidity in domestic bond markets.

The Budget 2020-21 had proposed to remove limit on foreign investment in some government securities, as a first step towards their inclusion in global bond indices. The RBI had, on March 30, notified a fully accessible route for investment by non-residents in government securities without any ceilings.

The central bank, in consultation with the Finance Ministry, is expected to put caps on the amount of specific securities that will be allowed to be traded on the Euroclear platform under the fully accessible route. With fiscal deficit rising sharply after Covid hit the economy, additional sources of funding into government debt market are expected to aid the Centre’s increased borrowing programme of more than Rs 12 lakh crore annually.

In July, the RBI unveiled a scheme allowing domestic retail investors to directly participate in the G-sec market. They can open and maintain a ‘Retail Direct Gilt Account’ with the RBI through a portal, which will also provide access to primary issuance of G-Secs and the secondary market as well.

Inclusion in bond indices, along with these measures, are aimed at supporting the government’s borrowing programme. The Financial Markets Regulation Department of the RBI, which is entrusted with the development and regulation and surveillance of G-secs market, has created a framework for international settlement of gilts. This would allow overseas investors to put money in government debt papers without the need to register as FPIs.

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