NRIs will soon be able to invest in Indian government securities

"It is a positive move by the government and will bring in a new class of investors in Indian g-secs. If it catches up, then it should push up demand for g-secs and in turn bring down the cost of borrowing for the Indian government. Investors from the developed markets may take keen interest in the G-Sec," says Sujoy Kumar Das, head fixed income, Invesco Mutual Fund. “.

According to Joydeep Sen, founder of wiseinvestor.in, NRIs sending money home may find this route interesting

What Sen means is that as opposed to sending cash from abroad to their family back in India, NRIs could also invest in g-secs and choose to have the redemption proceeds sent to their families back in India, at redemption time.

Experts, however, point out that the one should wait for the framework of rules that will be unveiled by the RBI and government. The operational flexibility will be watched out by all the stakeholders in this regard.

Voluntary Retention Route (VRR)- the framework that governs the investments by foreign portfolio investors undertaking long term investments in Indian debt markets- was introduced by RBI on March 1, 2019. VRR allows FPI to invest in Indian debt papers. The money invested under VRR is retained for at least three years. Put simply, an FPI brings in sticky money and invests with a minimum three year term. If it wants to exit, then it can do so by selling it to another FPI only. This way the money that has come from overseas is expected to stay here for at least three years.

Something similar can be expected when the rules pertaining to investments and settlement through ICSD will be announced. Such a policy can also ensure liquidity for those who want to exit before, say, three years. "For time being the RBI may not be expecting huge money coming in. Allowing international settlement is a gesture to the international investors to make Indian bonds more acceptable," says a fund manager who wish not to be identified. Five years from now ,we may see Indian G-Sec as part of global indices, he adds.

Currency risk will also be a key factor when it comes to investments from non-residents. Non-residents wanting to invest in Indian g-secs would need to buy rupee by paying in their home currency. The rupee so bought will be used to purchase g-secs. Similarly, interest payments and principal amounts that need to be remitted back to their residence countries would again need to be converted to foreign currencies. Here, experts say, non-resident investors would need to hedge their currency before investing in Indian g-secs to negate the effects of currency risk. If after the cost of hedging the investment return is not attractive, then the entire exercise may be futile.

Overseas investors will need keep a tab of the cost of hedging their currency exposure. However, experts say that as India see more inflows the currency hedging won't be a big trouble. If inflation remains under control and India continuously sees foreign inflows, then the cost of hedging will go down.

Though it all looks good, there are voices that express cautious outlook.

"Due to lack of awareness and poor liquidity, we have not seen Indian investors participating in the G-sec markets in India. The new initiative's success depends on how the rules are framed and the extent of interest shown by non-residents," says Sen.

Indian bond markets are not deep. Most domestic investors find it unattractive to invest in G-sec.

"Low interest rates on offer; complex operational issues in trading that leads to poor liquidity in the secondary market make many domestic investors including corporate treasuries to stay away from investing in G-Sec," points out Vikram Dalal, founder and managing director of Synergee Capital Services. He further points out that despite all the arrangements done by the stakeholders, most papers are illiquid and the spreads in the secondary market (difference between buy and sell price) are high wherever trading happens. Typically Indian investors prefer g-secs through mutual fund schemes.

Watch this space for further developments.