Monetary policy review: FPI investment limit in OIS market under review

Patra says exclusion of new 14/30-yr G-sec from FAR to boost 5/10-yr bond demand

The Reserve Bank of India (RBI) has been reviewing the investment limit for foreign investors in the overnight index swap (OIS) market, Deputy Governor Michael Debabrata Patra said in the post-monetary policy press conference on Thursday.

As of now, foreign investors have utilized 96 per cent of the Rs 3.5 billion limit allocated for OIS transactions, nearing the maximum threshold.

The OIS market, which is a derivative market for the government bond market, allows investors to hedge against interest rate fluctuations. Since JPMorgan included Indian bonds in its emerging market debt index last September, trading activities increased significantly in the segment.

“What the deputy governor said was right, that it will lead to more demand in the 5-year and 10-year segment. The OIS limit is also under review, I guess they will raise it because they want all the business to be on-shore. But the issue is that once the rules are established, they shouldn’t be kept changing because it creates some amount of uncertainty,” said Vikas Goel, managing director (MD) and chief executive officer (CEO), PNB Gilts.

Patra said excluding the new 14-year and 30-year government bonds from the Fully Accessible Route (FAR) will likely boost demand for 5-year to 10-year bonds. This increased demand will enhance liquidity in this segment, improve price discovery, and reduce transaction costs as the volume of debt rises.

“Our hope is that concentrating them into this 5/10-year segment will actually make it more liquid and better price discovery will occur, and transaction costs will fall as debt increases,” said Patra.

Currently, FPI investment in FAR securities stands at Rs 2.10 trillion, having surpassed the Rs 1 trillion mark in October 2023. Under the updated guidelines, foreign investments in the new 14-year and 30-year tenors will adhere to the existing RBI limit, which caps FPIs’ holdings at 6 per cent of a government bond’s outstanding limit. The existing 14-year and 30-year FAR-designated debt securities remain accessible to foreign investors in the secondary market.

“Even in the current situation, the real demand is in 5/10-year papers, that’s why they removed the papers,” said V R C Reddy, head of treasury at Karur Vysya Bank.

Reaching saturation

- The OIS market allows investors to hedge against interest rate fluctuations

- Foreign investors have utilised 96% of the Rs 350 crore limit for OIS transactions

- Since the inclusion of Indian bonds in JPMorgan emerging market debt index, trading activities picked up in the segment