RBI’s FAR policy shift may rattle bond markets
Exclusion of new issuances of 14-year and 30-year government securities (G-Secs) from the Fully Accessible Route (FAR) after the inclusion of 27 G-Secs in JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) index could lead to a loss of confidence, reduce participation, and put upward pressure on yields of these two securities, say bond market experts.
Late last month, the RBI, in consultation with the government, decided to exclude all new G-Secs of 14-year and 30-year tenors from the Fully Accessible Route (FAR).
Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLP, noted that FPIs prefer stable and predictable regulatory environments.
Changes in investment regulations can create uncertainty, making FPIs wary of the stability and predictability of the regulatory environment.
“FPIs may react to new rules, adjust their portfolios, and reassess their investment strategies,” Venkatakrishnan said.
With reduced FPI demand for 14 and 30 year tenors, there could be upward pressure on yields as the market adjusts to the lower level of participation from non-resident investors, per his assessment. However, large domestic investors can absorb fresh supply in these tenors easily.
Kaustubh Gupta, Co-CIO, Fixed Income, Aditya Birla Sunlife Asset Management Company, said RBI has removed 14 years and 30 years papers from FAR Securities as liquidity and supply at longer end of yield curve was limited.
He opined that RBI is probably concerned about the possible destabilising impact of large capital flows in fixed income markets and thus wants to restrict flows into the more liquid segment of the market.
“There is some sense of disappointment among offshore investors from the view of policy stability, given than the change happened so soon after India’s inclusion into bond indices,” Gupta said.
Jalpan Shah, Head Fixed Income – TRUST Mutual Fund, said RBI may have chosen to exclude fresh issuances of 14 and 30 year securities from FAR as the G-Sec yield curve was quite flat, and most likely that the demand was getting skewed towards the longer end G-Secs, distorting the yield curve.
Incrementally, as issuances in 5, 7 and 10 year increases, the average maturity and duration of Indian government bond composition of JPM-GBI-EM will also decrease gradually, he added.
Currently, the average maturity of the index is about 12 years. With no incremental addition of 14 and 30 year securities in the index, the average maturity of the index will come down over time, said Shah.
Before the exclusion of the 14 and 30 year G-Secs, there were 27 FAR-designated bonds which met JP Morgan’s index inclusion criteria.