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Liquidity push for debt markets: Plan to list G-secs on 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.

Written by Sunny Verma | New Delhi | Updated: December 11, 2020 4:49:37 am
The government had given up the earlier idea of issuing foreign currency denominated bonds as that has a currency risk.

A set of Indian government securities (G-secs) are expected to be included in global bond indices that would provide a stable sources of funding and increase liquidity for the debt markets. The Union 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.

Sources said the issues around capital control, KYC requirements and clearing and settlement of such securities have largely been addressed, which should facilitate their entry into global indices. “Most of the ground work has been done to meet the requirements of (entry into global indices). Without removing overall investment limits, ceilings were removed on a class of securities for hassle free clearing and settlement in them. Other issues of KYC and clearing and settlement have also been sorted out. These securities can garner the kind of liquidity that is required for effective trading in overseas markets,” a senior government official said.

The government had given up the earlier idea of issuing foreign currency denominated bonds as that has a currency risk. “The main concern of bond index providers is that there should be no limit in entry and exit from a particular government security, which requires that there are no limits on foreign ownership in a particular security. This issue was resolved through removal of limits on a class of securities without really removing overall capital controls which carry significant risk. This is providing enough liquidity to these bonds,” the official said.

With fiscal deficit expected to widen significantly in the backdrop of the Covid-19 pandemic, additional sources of funding into government debt market are expected to aid the Centre’s borrowing increased programme. The Centre is expected to overshoot is fiscal deficit target of 3.5 per cent of GDP for the current fiscal as a result of rising expenditure and lower revenue receipts.

As government’s tax and non-tax revenues plunged following the imposition of lockdown to combat coronavirus, the finance ministry had in May increased its market borrowing programme for the current financial year by more than 50 per cent to Rs 12 lakh crore. The Union Budget 2020-21 had earlier estimated the gross market borrowing for the current fiscal at Rs 7.80 lakh crore. The government has already borrowed Rs 7.66 lakh crore during April-September in the current year.

While fund raising for the government is not an issue given abundant liquidity with banks, low interest rates and tepid private sector credit growth; inclusion of securities into global bond indices opens up the avenues to massive pools of long term funding. “The idea is to get access to these pools of funds which can be as high as $ 2 trillion, as it would be positive both for government securities as well as private corporate bond market,” sources said.

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