India may consider including long-tenure bonds in FAR if foreign portfolio investment picks up

On July 29, RBI excluded all new government securities with 14- and 30-year tenures from the FAR facility, limiting foreign investors’ access to these bonds.

India may include longer-duration bonds in the fully accessible route (FAR) if foreign portfolio investor (FPI) demand increases, a government official said. Currently, interest from foreign investors for securities with maturities beyond 10 years has been lukewarm, he added.

To be sure a decision on such a move, if at all, will be taken in tandem with India's central bank.

Designed to attract foreign capital into the debt market, FAR allows non-residents to invest in specific Indian government bonds without any limits. However, on July 29, the Reserve Bank of India (RBI) excluded all new government securities with 14- and 30-year tenures from the FAR facility, limiting foreign investors’ access to these bonds.

The decision to exclude longer-tenure bonds comes at a time when most foreign investments have been concentrated in bonds with tenures of 10 years or less. While existing securities of 5, 7, 10, 14, and 30-year tenures account for Rs 41 lakh crore in investments, only about Rs2 lakh crore comes from foreign inflows, illustrating the limited interest in longer-term bonds, the official added, requesting anonymity.

The finance ministry did not respond to an e-mail seeking a comment on this matter.

The central bank’s restriction on access to new 14- and 30-year government bonds came amid some economists’ raising concerns over volatile inflows tied to India’s inclusion in key global indices.

The finance ministry will, however, retain shorter-tenure bonds, including new issuances of 5, 7, and 10 years, in the FAR facility due to higher foreign investor interest in these securities.

NSDL data confirms low FPI participation in long-term government bonds, with only Rs 687.72 crore in 7.72 percent G-secs maturing in 2049, Rs 997.43 crore in 7.16 percent G-secs of 2050, and Rs 3,529.20 crore in 6.67 percent G-secs maturing in 2050.

“Papers of 5, 7, 10-year tenures will stay in the FAR route, including fresh issuances. We are not dissuading anyone from coming in or from using the normal route,” this official said, adding that the decision to exclude new issuances of longer bonds was taken keeping in mind the risk of dollar drawdown during a global crisis.

While India’s central bank excluded new securities issued under 14 and 30-years bonds from FAR, existing stocks of both these securities, already included under the FAR will continue to be available for investments by non-residents in the secondary market.

On the reason behind excluding new issuances of certain securities from FAR, the official said, “The door was ajar till now. And anyone could walk in. Now the difference is that you have to knock. And the door will be opened. We have a history of dollar draw down during a global crisis, so the step was taken as part of prudent debt management.”

India’s watchful approach towards the FAR route comes after Indian bonds were included in global indices.

Indian sovereign bonds were included in JP Morgan’s Global Government Bond Index – Emerging Markets (GBI-EM) on June 28. Additionally, Bloomberg Index Services announced plans to incorporate Indian sovereign debt into its Emerging Market Local Currency Government Index starting January 31, 2025.

While the inclusion of Indian government bonds in global indices like JP Morgan’s GBI-EM and Bloomberg’s Emerging Market Local Currency Government Index is expected to boost demand and lower bond yields, some experts warned that it may also lead to volatile inflows and heightened global scrutiny of India’s domestic policy.

On September 22, chief economic adviser V Anantha Nageswaran pointed out that following the bond index inclusion, the government would need to watch what foreign investors think about domestic policy, and even unrelated developments could impact local markets.