Gilts set to go global: Overseas investors get another channel

"We expect that at their next review of index constituents, entities like JP Morgan and Barclays should be able to include Indian gilts in their indices, giving access to investors to participate in our market,” a senior Finance Ministry official said.

The plan to list a set of government securities in global bond indices has been in the works for many years now.

3 min readNew DelhiAug 20, 2021 03:41 AM IST First published on: Aug 20, 2021 at 03:30 AM IST

The government expects to start trade and settlement of debt securities on the international Euroclear platform, a move that would pave the way for inclusion of G-sec in global bond indices anytime soon. “We have made the arrangements, most of the bond platform requirements have been met. This should open another channel to attract overseas capital in Indian debt markets,” a senior Finance Ministry official said on Wednesday.

“Taxation issues including the exemption from capital gains on the international transactions have been amicably addressed. We expect that at their next review of index constituents, entities like JP Morgan and Barclays should be able to include Indian gilts in their indices, giving access to investors to participate in our market,” 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. 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 Reserve Bank of India 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.

Explained

Framework for international settlement

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.

Last month, 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.

“The Department initiated the process of international settlement of Indian government securities through International Central Securities Depository (ICSD) in consultation with the Government of India, ICSDs and other stakeholders. Clients of ICSDs would be able to invest in Indian G-sec without registering themselves as foreign portfolio investors (FPIs),” the RBI said in its annual report released on May 27.