RBI imposes new controls on foreign ownership of India bonds to manage inflows. Why the central bank move matters

The Reserve Bank of India (RBI) has implemented new controls on foreign ownership of newly issued bonds. Bloomberg reported on Tuesday, July 30, that officials are becoming uneasy with the billions of dollars of money flowing into the domestic market thanks to the inclusion of Indian bonds in JPMorgan Chase & Co's emerging market index.

The Reserve Bank of India said in a statement that foreign investors will not have full access to the newly issued Indian government bonds with 14-year and 30-year tenure. According to the central bank, the change is effective immediately. The authorities want the demand for the India bonds to be concentrated in the front end to enhance the flexibility of the curve, Bloomberg reported, quoting people aware of the development.

This move from the central bank comes after the JPMorgan Chase & Co emerging market index inclusion and the volatility in the global markets caused due to the election results and the central bank adjusting policy.

“It does point to the fact that the government continues to be reluctant to encourage foreign bond inflows,” Shamaila Khan, the head of fixed income for emerging markets and Asia Pacific told the news agency.

Foreign investors increased their holdings of longer Indian bonds in recent months, according to data compiled by Bloomberg. This marks a potential bid to lock the yields before an RBI interest rate cut. Approximately, 40 per cent of the money is in the form of fully accessible route (FAR) government notes with a maturity period of five years or less than that, according to the report.

The RBI wants the demand to be concentrated in the 10-year bonds segment, said anonymous sources quoted in the report. The maturities of the 27 FAR bonds eligible to join the JPM index range between June 2027 and January 2054, according to a Wall Street lender report quoted by Bloomberg.

JP Morgan spokesperson refused to comment on the news agency's questions about whether the July 29 directive may change the composition of securities in the index. The RBI did not immediately respond to the development.

Global funds have poured over $12 billion into Indian bonds since India's inclusion in the JPM index announcement in September 2023, and the Indian local-currency bonds were the top performers in emerging markets in Asia this year, as per the report.

The RBI has bought dollars to keep the forex reserves at a level to keep the rupee fluctuations in check. The India 30-year bond yield rose 2 basis points (bps) to 7.05 per cent on Tuesday, as per the report.

Goldman Sachs Group Inc and other firms are expecting India's rise will attract flows of as much as $40 billion, and the country's weight in the index will gradually rise to 10 per cent levels, as per the report.

There are more than 30 FAR securities at the moment, reported the news agency quoting The Clearing Corporation of India.