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India is seeking to boost liquidity in shorter-term government bonds by restricting foreign investors’ access to some longer-dated notes, according to officials with knowledge of the matter.
Authorities want demand to be concentrated in bonds with tenors of 10-years and below to make the yield curve more flexible, the officials said, asking not to be identified as the matter is private. The move is also a preemptive action to ensure India isn’t impacted by global outflows in the future, according to another official.
New government bonds with 14-year and 30-year tenors will no longer be under the so-called Fully Accessible Route category that provides foreign investors condition-free access, the Reserve Bank of India said Monday. The decision comes as billions of dollars of inflows are expected after the nation was included into JPMorgan Chase & Co.’s flagship emerging-market bond index in June-end.
Read: India Will Shield Some Newly Issued Debt From Foreign Investment
The latest steps are adequate for now to manage liquidity in the market and check any potential volatility, one of the officials said.
Spokespersons for the finance ministry and the RBI didn’t respond to requests seeking comments.
Flat Curve
India’s yield curve has been exceptionally flat this year as traders expect the central bank to cut interest rates. The spread between the 30-year and five-year sovereign debt narrowed to nearly three basis points at June-end, the lowest since March 2023.
India’s bond yield curve is set to steepen following the central bank’s move to restrict foreign access to some notes, said Eric Fine, head of emerging-markets active debt at Van Eck Associates. The decision will channel demand into tenors of 10 years and below, Fine said.
Indian 30-year bond yields climbed two basis points to 7.06%, while the most traded bonds with maturity closest to 14-year also saw yields rise.
“Some steepening has already happened and the yield curve can steepen a bit further but it depends on how RBI looks at it,” said Puneet Pal, head of fixed income at PGIM India Mutual Fund, “The central bank may not want yields to fall too fast, especially at the longer end.”
--With assistance from Ronojoy Mazumdar.
(Updates bond prices, adds details on yield curve and investor comment)
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