RBI Cautions Against Debt Liberalisation

The apex bank has warned against ‘investment tourists’ in the domestic debt market as they can withdraw funds at a whiff of trouble

Published: 20th January 2015 06:00 AM  |   Last Updated: 20th January 2015 05:17 AM   |  A+A-

MUMBAI: The Reserve Bank of India has suggested exercising caution in opening up the debt market for foreign investors.

“The financial stability implication of ‘investment tourists’ exiting at a whiff of trouble has always to be kept in mind as we progress along the path of liberalisation,’’ G Padmanabhan, executive director of the Reserve Bank, said at a meeting of Primary Dealers Association of India.

RBI.jpgThe speech was put out on the Reserve Bank of India website on Monday.

With regard to foreign investment in domestic financial markets, our policy has been to increase access in a calibrated and gradual manner, Padmanabhan said.

The advantages of widening and diversifying investor base which improves demand for government bonds need to be kept in view along with the considerations about financial stability arising from sudden-stop and reversal risks.

He was speaking in the context of proposals for allowing international settlements of Indian government bonds through global securities settlements systems such as Euroclear.

These settlement mechanisms could potentially improve acceptability and attractiveness of Indian bonds among foreign investors, he said.

Indian bonds market has attracted a record investment from overseas investors in 2014, of about $26 billion. Indian interest rates were much more attractive than the interest rates prevailing in the US.

In this regard, Padmanabhan reminded the Primary Dealers that there also prevails a risk of liquidity getting fragmented if foreign portfolio investors (FPI) moving offshore and development of a parallel yield curve outside India, as is the case in non-deliverable forwards (NDF) in the foreign exchange market.

“Going forward, the gross bond supply would remain elevated even after fiscal consolidation as the government is likely to continue running fiscal deficits in the foreseeable future due to the accumulated debt stock that needs to be rolled over as also the country’s growing GDP,’’ he said.

“The demand for bonds would be impacted among other factors, by the likely pickup in the private sector credit, scaling down of SLR and HTM, the policy stance on foreign portfolio investment in G-sec, among others.’’

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