Possibility of imposing caps on govt bonds to curb hot money inflows

India could choose to reimpose foreign investment limits on some government securities, if inclusion of local bonds in JPMorgan's emerging market debt index leads to a deluge of inflows, a top government official said.
 

Foreign investment limits had been removed from key liquid government bonds in 2020, and these securities placed in a category called 'Fully Accessible Route' (FAR), to enable India's entry into global bond indices.
 

J.P. Morgan announced last September that Indian bonds will be part of its emerging market index starting June this year, with India's weightage in the index set to rise to 10 per cent by end-March 2025.
 

"Once a security is part of FAR, it will continue to be, there cannot be any change," India's Economic Affairs Secretary Ajay Seth told Reuters in an interview.
 

"But that doesn't mean every future security has to be fully accessible. Incrementally, changes can be made to keep a check on foreign fund inflows," he said.
 

Since September, when India's inclusion in the JPMorgan index was announced, foreigners have invested a net amount of $12.7 billion.
 

Inflows since the actual inclusion on June 28 have been around $1.9 billion a month, a tad below the anticipated run rate of $2 billion a month, which was expected to come in the first week.

 

Any changes to the government's policy on foreign investment in local bonds will be done in a "non-disruptive manner", Seth said.
 

Separately, in the local market, Seth said the government may buyback more of its existing debt in the current fiscal year but such a step will be dependent on market liquidity.
 

"Certainly scope is there ... Depending on market conditions, there is scope to conduct more bond buybacks." The Indian government buys back bonds when it has surplus funds but its five attempted buybacks have seen little success, as these securities were below the price that most investors had bought.
 

India was able to buyback only about Rs 30,200 crore worth of bonds from the market, a tiny amount compared with the Rs 2.3 trillion it had offered to purchase.
 

"It is not just a function of government wanting to buy back," Seth said, adding the buybacks also depend on the bond holders' need for cash.
 

India, in its latest budget, said it will target the buyback of bonds worth Rs 30,248 crore for the current financial year that started April 1.


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