Longer tenure bond yields harden after RBI's FAR securities curb

Inflows into shorter tenure bonds likely to be boosted

Yields on longer-tenure government bonds edged higher on Tuesday, following the Reserve Bank of India’s (RBI’s) decision to withdraw free access to new 14-year and 30-year bonds under the fully accessible route (FAR) for foreign portfolio investors.

Previously, FAR allowed foreign investors unrestricted access to these bonds, but the new measure is expected to redirect inflows towards shorter-term bonds instead.

The yields on the 14-year and 30-year government bonds increased by 3 basis points, while the benchmark 10-year bond yield experienced a 1 basis point rise.

Shrisha Acharya, vice-president at AnandRathi Global Finance, said: “The impact of the notification has been seen today (Tuesday). There was selling in the longer-term (bonds), which was expected. The short-term (bond) didn’t rally much. The yield curve would be on the steepening bias, where shorter-tenure securities will outperform longer-tenure bonds.” He also noted a surge in buying activity “towards the belly of the curve”.

Currently, FPI investment in FAR securities stands at Rs 2.03 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 limits, which cap FPIs’ holding 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. Market analysts assert that this move by the RBI will not significantly impact FPI investments, given the ample limits and alternative avenues available for foreign investments in domestic bonds.

“The impact is limited because there are other categories, and more than adequate limit is there. FPIs will not fall short of choices,” explained Naveen Singh, vice-president at ICICI Securities’ primary dealership. “For domestic players, maybe now, people will read it as 14-year and 30-year won’t be the favourite stock in demand. So, people will try and get out of that, and we have seen some reaction today where long-end securities were sold off,” he added.

Some market participants suggest that the RBI’s decision to withdraw free access to long-tenure FAR routes is designed to safeguard returns for domestic long-term investors, such as life insurers and pension funds. The measure also seeks to temper heightened competition and demand from foreign investors drawn to bonds heavily featured in global indices, which often favour longer-duration securities.