Centre plans to make Indian debt market attractive

May provide G-Sec availability on tap

Centre plans to make Indian debt market attractive

 In order to make foreign capital flows into Indian debt market more attractive, the government may do away with auction of government securities (G-Sec) for foreign institutional investors and make them available on tap.

 The move is being considered after the quick exit of foreign investors from the debt markets sent the rupee sliding. Foreign institutional investors have sold $3.7 billion of Indian debt from the last week of May to mid-June. This has also raised concerns whether the bond sell-off will be followed by sell-off in equities.

 “We may make G-sec available on tap by doing away with the auction process," a finance ministry official said.

 "FIIs have been seeking simplification of norms for G-Secs," the official said.

 Dealers reacted positively to such a thinking in finance ministry saying if the limit to investment in gilts were open, more institutional investors will participate as it will give them the freedom to buy and sell from the market whenever they want. 

However, the flipside to the move, according to analysts, is that it will introduce volatility into the Indian debt market.

Experts said the huge sell-off was due to weakness in the Indian currency, which is instrumental in the FIIs exiting debt markets as the cost of hedging a volatile rupee is rising and in turn hurting the yield differential the FIIs are working with.

 Of late, the Indian currency has been consistently hitting record lows and slumped to a lifetime low of 58.98 in the intra-day trade against the US dollar on June 11.

 FIIs have been aggressive buyers of bonds since the beginning of 2013 on account of higher yields offered by government and corporate debt.  

Besides, steps taken by the government to ease FII investment rules by doing away with sub-limits and reducing the withholding tax on debt investments have also helped the segment.

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