INR bond market liberalisation takes a leap forward

RBI releases transparent medium-term framework for greater foreign investment in IGBs. Allowed foreign investment in central government bonds will be increased by USD18.2bn over the next 10 quarters. The RBI announced that additional foreign investment of INR1,200bn (USD18.2bn at current exchange rate) will be allowed in central government securities by March 2018 over and above the existing limit of INR1,535bn (USD23bn at current exchange rate) for all government securities (G-secs). This change will take the total allowed foreign investment in IGBs to INR2,735bn (USD49bn at current exchange rate). 

Additional USD7.8bn of investment allowed in state government bonds. On top of the above mentioned increase in foreign investment in central government bonds, the RBI opened a different channel for foreign investment in state government bonds of INR500bn (ie, USD7.8bn), which takes the net increase in allowed foreign investment to USD25.8bn. Increases to be in quarterly phases. The increases of USD25.8bn (USD18bn for central government bonds and USD7.6bn for state government bonds) will be implemented in quarterly phases over the next 10 quarters. 

Increase in limits of USD2.5bn for each of the next two quarters (October 2015-March 2016). The next two quarters will see increases in the Foreign Portfolio limit (FPI) of USD2.5bn/quarter (on 12 October 2015 and 1 January 2016). However, 57% of the IGB allocation for the next six months is fixed for long-term investors only (ie, central banks, sovereign wealth funds), while state bonds are open to all investors. 

Allowed issuance of "Masala" bonds (INR offshore bonds). As a follow-up to the initial guidelines on INR offshore issuance published in April 2015, the RBI announced that Indian corporates eligible to raise external commercial borrowings (ECB) will now be allowed to issue offshore INR bonds. 

"We believe that a wide cross-section of investors will be keen to participate in this market. In addition to international institutions, we expect private banks, driven by the interest of nonresident Indians, to be active buyers. We view this as a very supportive development for the INR, IGBs and cross-currency swaps", notes Barclays.