MUMBAI: Bonds rallied on Friday after the government and the Reserve Bank of India (RBI) announced measures to encourage foreign investment in government securities. The yield on the benchmark 10-year government securities (G-Secs) softened to 6.94% in early trades, down from 6.99% on Thursday, following the government's decision to exempt foreign portfolio investors (FPIs) from long-term capital gains (LTCG) tax and withholding taxes on interest from G-Secs. Bond prices and yields move inversely.
Key Measures Announced
According to Ramkamal Samanta, Chief Investment Officer at Star Union Dai-ichi Life Insurance, the abolition of LTCG tax and removal of withholding tax on interest income for FPI investments in G-Secs, along with the inclusion of 15-, 30-, and 40-year papers under the Fully Accessible Route (FAR) securities universe with no investment limit, are positive for the Indian fixed income market over the medium term.
Until now, FPIs were allowed to invest in 10-year G-Secs under the FAR mechanism. The government also lifted the concentration limit and the security-wise limit for investments by FPIs in G-Secs, a release stated.
Market Impact and Outlook
"The decisions are aimed at attracting more foreign flows through major index inclusion channels," Samanta said. "However, in the near term, the market is likely to be influenced more by global yield movements and domestic inflation dynamics."
The equity market, however, reacted negatively to the government's decision to liberalize FPI investments in the sovereign bond segment while keeping rules for investing in stocks unchanged. Consequently, the Sensex closed 117 points lower at 74,243 points, with net selling by foreign funds in stocks on Friday amounting to Rs 8,776 crore, as per BSE data.
These measures are expected to enhance foreign participation in Indian government securities, potentially leading to lower borrowing costs for the government and increased liquidity in the bond market.
