India likely to amend rules to check hot flows on bond index entry

Central bank has designated class of bonds that can have full foreign ownership, JPMorgan Chase & Co. has included securities from this set of bonds into its emerging markets index that India joined

India may amend rules for the issuance of new bonds that are eligible to trade on global indexes if large inflows spur volatility, according to a top finance ministry official.

The government has an option to tweak the fully accessible route for securities that will be issued in the future, the person said, asking not to be identified as the discussions are private. It may impose a limit on foreign inflows in the so-called FAR bonds if there’s an excessive surge in flows, the official said. 

A Finance Ministry spokesperson didn’t immediately respond to a request seeking comments. 

The central bank has designated a class of bonds that can have full foreign ownership. JPMorgan Chase & Co. has included securities from this set of bonds into its emerging markets index that India joined last month.

Foreign funds have poured $12 bn in these index-eligible bonds since the inclusion announcement in September. The US bank has said about $25 bn of inflows may come in as India’s weight on the index goes up to 10% by March.

The nation’s central bank has been mopping up most of the dollars coming in, with its foreign exchange reserves swelling to a record. It also sold bonds in the secondary market this month to sponge off some of the rupee liquidity.

Earlier this month, Reserve Bank of India Governor Shaktikanta Das said he was not worried about any deluge of inflows resulting from the index inclusion. The RBI has “multiple instruments” to deal with it, Das said.

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