Majority of foreign demand for FAR bonds for 5-10 year terms: RBI deputy governor Michael Patra

Mumbai: The majority of the foreign portfolio investor (FPI) demand for Indian securities under the fully accessible route (FAR) is for bonds with a tenure of up to 10 years, Reserve Bank of India (RBI) deputy governor Michael Patra said.

“We have observed that the major part of the interest of FAR investors is in the 5-10 years segment; actually, it accounts for 90% of the total investment. The interest in the 30-year paper is just 2% of the total stock of 30-year (bonds) that has been issued,” Patra said in a post-policy press conference.

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In turn, total FPI holding under various routes, as a share of total outstanding papers, is only 4.8%, Patra said, adding that the security-wise, category-wise and concentration limits under the medium-term framework (MTF) act as “natural barriers to any volatility” in the segments.

FAR allows non-residents to invest in some Indian government bonds without any limits. Introduced in 2020, the framework was designed to encourage foreign investment through lower restrictions and quicken inclusion of Indian bonds in global bond indices. On 29 July, the RBI excluded all new securities with a 14-year and 30-year tenor from the FAR. 

Fresh investment regulated

This implies that while non-residents can continue to access existing 14-year and 30-year government securities in the secondary market, fresh investments by FPIs in 14-year and 30-year tenor bonds will be as per prescribed regulatory limits. Existing foreign investment limits in regular bonds cap overseas investment at 6% of outstanding stock. 

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The restriction followed a surge in foreign inflows into Indian securities following the inclusion of some domestic bonds in key global indices. Indian sovereign bonds were included in JP Morgan’s Global Government Bond Index – Emerging Markets (GBI-EM) on 28 June. Later, Bloomberg Index Services too announced including the bonds in its Emerging Market Local Currency Government Index effective January 31, 2025.

Demand concentrated

However, so far, demand has been concentrated in bonds with tenures of up to 10 years.

“It's like giving time to people to adjust their portfolios because we know that the weight of India in the bond index will slowly rise over a 10-month period, so they will have time to adjust their portfolios,” Patra said. 

Including all existing securities issued, the total stock of available investments under FAR is around ₹41 trillion, of which the current foreign investment is only ₹2 trillion, he said, adding that this reflects that there is “ample amount of space to go”. 

“Our assessment is that in the categories that are now allowed, there is going to be ₹4 trillion of new issuances which are open to FAR. Apart from that, there is the MTF (medium term framework), where while the limit is ₹6 trillion, only 2% (is utilised) today, so it's not as terrible as it is made out to be,” Patra.

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He added RBI’s hope is that concentrating foreign investments into the 5-10 year segment will also help make the segment more liquid, aid better price discovery and reduce transaction costs as depth of the market increases.

Asked about global investor sentiment regarding Indian securities following the inclusion in global indices, RBI governor Shaktikanta Das said that global investor sentiment is “very high” and positive, as reflected in the flows being seen today.

“As far as GDP growth is concerned, India is expected to be the highest among major economies IMF has also revised its India target from 6.8% to 7%, so international confidence remains intact,” Das said.