MUMBAI: Foreign funds have been pouring money into sovereign bonds after the government and RBI, earlier this month, eased rules for these investors to invest in government securities (G-Secs), aimed mainly at supporting the rupee. Between June 5, the day the rules were changed, and now, FPIs have net bought G-Secs worth about $2 billion, official data showed. Some estimates, however, said the total is nearing the $3 billion mark.
Among the rules that were changed was the removal of withholding tax for foreign portfolio investors (FPIs) investing in G-Secs and an increase in some of the investment limits in these bonds. The government's decision to ease investment rules for NRIs to invest in India has also been aiding this FPI surge in government bonds, market players said.
According to Sandeep Bagla, CEO of TRUST Mutual Fund, the decision to remove withholding tax on interest on G-Secs has attracted FPI flows from a variety of players, including real money investors with a longer-term horizon, multi-asset funds that have shifted to G-Secs for margin to exchanges to support derivative positions, and bond traders. "Funds have invested across the yield curve from 5-year to over 30-year G-Secs as the outlook on the rupee is positive now," Bagla said. Data from NSDL showed that while nearly $1.8 billion came through the RBI-approved Debt-FAR (fully accessible route), another $126 million came through the Debt-VRR (voluntary retention route).
Debt market players said that the government's and RBI's decision on G-Secs could now also allow some Indian sovereign bonds to be included in global bond indices, resulting in more FPI buying interest in these papers. As a result of the foreign fund flows into G-Secs, since June 5 the benchmark 10-year yield has softened by about 14 basis points: from its close at 6.98% on June 5, the 10-year bond yield on Thursday closed at 6.84%.
