Foreign investors perceive India's move to reinstate restrictions on the purchase of some government securities as a policy shift that may require them to rethink their investment plans, global fund managers said on Tuesday.
Such constraints were removed from essential liquid government bonds in 2020 to allow India to join global bond indexes, but the central bank announced late Monday that new 14-year and 30-year government notes will be excluded from what is known as the fully accessible route, or FAR.
The Reserve Bank of India stated that the decision was taken in conjunction with the government, but provided no explanation. The JPMorgan index includes ten FAR securities with maturities of more than ten years, representing more than Rs 40,600 crore ($4.85 billion), or one-fifth of total FAR bond ownership.
The aggregate weightage of these papers in the index is expected to climb to 3.87 percent by March 2025, accounting for over two-fifths of the entire weight for Indian bonds. The FAR exclusion comes little over a month after India's debt was included in JPMorgan's emerging market debt index, and Bloomberg Index Services intends to incorporate the country's bonds in its EM local currency index in January 2025. Having said this, JPMorgan has declined to comment on the situation.
"The RBI's decision introduces uncertainty into the Indian bond market and is likely to prompt reassessment of investment strategies by foreign investors," said Manish Bhargava, a portfolio manager at Straits Investment Management.
According to a senior trader at a foreign bank, officials were clearly concerned about big foreign ownership of longer-term bonds because they might be unable to regulate yield levels, which might force borrowing costs higher if macroeconomic fundamentals change in the future.
According to fund managers, decreasing international involvement may have an impact on liquidity, making it harder to trade huge quantities without experiencing price volatility. Domestically, traders will continue to purchase longer-term bonds when rates rise in order to sell them when they fall, according to Alok Sharma, ICBC's head of treasury. However, Bhargava warned of increased volatility.
"The market dynamics could trigger greater reliance on domestic investors to absorb the additional supply. As the market adjusts to this new landscape, bond prices might experience increased volatility," he said
