Foreign investors see India’s decision to return to curbs on purchases of some government securities as a flip-flop in policy that may force them to redraw investment strategies, global fund managers said on Tuesday.
Such limits were dropped in 2020 from key liquid government bonds to enable India’s entry into global bond indices, but late on Monday, the central bank said new 14-year and 30-year government bonds would be kept out of what is known as the fully accessible route, or FAR.
The decision had been made in consultation with the government, the Reserve Bank of India added, but gave no reason.
“These sort of moves push away foreign investors from emerging markets that have a pattern of going back and forth in terms of regulations, which is one of the biggest turn-offs,” a foreign fund manager based in Singapore said on condition of anonymity, as he is not authorised to speak to media.
Last week, a top government official told Reuters that India could choose to re-impose foreign investment limits on some government securities, if inclusion in JPMorgan’s emerging market debt index led to a deluge of inflows.
The central bank and finance ministry did not immediately respond to emails seeking comment.
Ten securities of maturities longer than 10 years that are a part of FAR are included in the JPMorgan index, with an aggregate holding of more than 406 billion rupees ($4.85 billion), or a fifth of overall ownership of FAR bonds.
The combined weightage of these papers in the index is set to rise to 3.87% by March 2025, or nearly two-fifths of the overall weight for Indian bonds.
The FAR exclusion comes just over a month after India’s debt was included in JPMorgan’s emerging market debt index, while Bloomberg Index Services is set to include the country’s bonds in its EM local currency index from January 2025.
JPMorgan declined to comment on the matter.
“The RBI’s decision introduces uncertainty into the Indian bond market and is likely to prompt a reassessment of investment strategies by foreign investors,” said Manish Bhargava, a fund manager at Straits Investment Management.
A senior trader with a foreign bank said it was clear authorities were not very comfortable with large foreign ownership of longer duration bonds as they might prove unable to manage yield levels that could push their borrowing costs higher when macroeconomic fundamentals shift in future.
Fund managers said reduced foreign participation could affect liquidity, making it difficult to trade large volumes without price fluctuations.
On the domestic front, traders will continue to buy longer-tenor bonds at every uptick in yields to sell when they fall, said Alok Sharma, head of treasury at ICBC.
Bhargava pointed to a risk of greater volatility, however.
“The market dynamics could trigger greater reliance on domestic investors to absorb the additional supply,” he said. “As the market adjusts to this new landscape, bond prices might experience increased volatility.”