Fully Accessible Route (FAR): The Pros & Cons

In the Union Budget for 20-21, several measures were proposed to enhance the breadth and depth of the markets which included greater access for overseas investors, introduction of ETFs, and access to infrastructure investments with a tax holiday. The RBI has announced enhanced limits for foreign investments in governments securities and corporate bonds, and also investment without any cap in the benchmark government securities specified from time to time.

FPI Investment Limits

The limit for FPI investment in corporate bonds is increased to 15% of outstanding stock for FY 2020-21.

The tentative limits for FPI investment in Central Government securities (G-secs) and State Development Loans (SDLs) for FY 2020-21 is as follows. There will be a separate communication on revised limits from the RBI later.

Specified securities under the Fully Automatic Route with effect from April 1, 2020, is given below. The issue size or outstanding in each security and the existing FPI investments is given in the table below:

Our View:

  • Even if the specified securities are fully invested the total amount is Rs. 4,20,000 Crs., less than 10% of this is invested even though FPIs could have gone up to 30% in taking exposure. So, it may take time for the exposure to build up despite the freeing of the limits to 100% of each security.
  • Even if 100% exposure can be taken it is restricted by the issue size or the amount available in the market for investments. The government can go in for re-issue of these securities, if need be, to enhance the liquidity in these securities.
  • The entry of overseas investors in gilts in a big way has been expected for quite a long time now based on the calculation that gilts may be made a part of the global bond indexes at some point of time. But the reluctance in inclusion of gilts is reported to be based on two factors which are working against it. One, the gilts market is controlled very closely by the RBI, and two, the Rupee is still under managed floating and not free floating. These two reservations still remain. But enhancing the FPI participation is a step in the right direction.
  • It may be borne in mind that as more overseas buying comes in some pressure on long term yields may ease, especially, in the light of the favorable liquidity conditions in the domestic markets. It is felt that the rise in FII holdings could lead to heightened volatility, but the same may be mitigated to a certain extent by regulating the issuance of “specified securities”.





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