FAR bonds

FAR bonds

Subject: Economy

Context:

Foreign investors have sold Indian government debt worth nearly $500 million in the past two sessions, with the so-called FAR bonds bearing the brunt of a selloff.

Details:

Causes:

• Market participants linked the sudden move to the Fed’s policy decision due on Wednesday.
• Disappointment that Indian government bonds would not be included in major global bond indexes.

Concept:

FAR securities:

• To attract capital flows to the bond market, Budget 2020 announced a programme that allows foreign investors to buy unlimited amounts of select government bonds via the fully accessible route (FAR).
• This was a major policy shift through which the government sowed the seeds for India’s inclusion in the global index
• It created a separate channel called Fully Accessible Route (FAR) to enable non-residents to invest in specified Government of India dated securities .
  • ‘Specified securities’ shall mean Government Securities as periodically notified by the Reserve Bank for investment under the FAR route.
  • The RBI has said that all new issuances of Government securities (G-secs) of 5-year, 10-year, and 30-year tenors will be eligible for investment as specified securities.
• Thus, Non Resident investors can invest in specified government securities without being subject to any investment ceilings.
• Existing routes apart from FAR:
  • The Medium Term Framework (MTF) for Foreign Portfolio Investment (FPI) in Central Government Securities (G-secs) and State Government Securities (SDLs) was introduced in October 2015.
  • The Voluntary Retention Route (VRR) encourages Foreign Portfolio Investors to undertake long-term investments in Indian debt markets.
    • The aggregate investment limit shall be ₹ 40,000 crores for VRR-Govt and ₹ 35,000 crores for VRR-Corp.
    • The minimum retention period shall be three years. During this period, FPIs shall maintain a minimum of 75% of the allocated amount in India.
    • Investment limits shall be available on tap for investments and shall be allotted by Clearing Corporation of India Ltd. (CCIL) on ‘first come first served’ basis.

Emerging Markets Bond Index (EMBI):

• The emerging markets bond index (EMBI) is a benchmark index for measuring the total return performance of international government and corporate bonds issued by emerging market countries that meet specific liquidity and structural requirements.
• The emerging markets bond index (EMBI) tracks the performance of emerging market bonds and was first published by investment bank JP Morgan.
  • Emerging market bonds are debt instruments issued by developing countries, which tend to carry higher yields than government or corporate bonds of developed countries.
• Most of the benchmark EMBI index tracks emerging sovereign debt, with the rest in regional corporate bonds.
• Need –Despite their increased riskiness relative to developed markets, emerging market bonds offer several potential benefits such as portfolio diversity as their returns are not closely correlated to traditional asset classes. Thus, Global bond indices help investors track the movement in bonds in multiple jurisdictions and aid in relative comparisons.
• What basic criteria is required for index inclusion?
  • The countries must meet parameters on liquidity, safety, and returns. The main parameters include
    • The size of the market
    • The country rating
    • Ease of access
    • Country-level criteria for index inclusion includes

• Absence of restrictive laws on movement of capital
• Availability of forex
• Adequate hedging mechanism
• Tax laws
• Settlement of trade

Example-The JPMorgan Emerging Market Bond Index (EMBI) are a set of three bond indices to track bonds in emerging markets operated by J P Morgan. The indices are the Emerging Markets Bond Index Plus, the Emerging Markets Bond Index Global and the Emerging Markets Bond Global Diversified Index. An external debt version, the EMBI+ is the JPMorgan EMBI Global Index.