RBI Deputy Governor Michael Patra is at the forefront of the Reserve Bank of India’s efforts to review the investment limit for foreign investors in the overnight index swap (OIS) market. In a recent post-monetary policy press conference, Patra highlighted the need to reassess the current limit as foreign investors have already utilized 96% of the Rs 3.5 billion allocated for OIS transactions, nearing the maximum threshold.
The OIS market serves as a derivative market for the government bond market, providing investors with a platform to hedge against interest rate fluctuations. The inclusion of Indian bonds in JPMorgan’s emerging market debt index last September has significantly boosted trading activities in this segment, leading to increased demand for OIS transactions.
Vikas Goel, managing director and CEO of PNB Gilts, expressed his views on the potential increase in demand for 5-year and 10-year bonds following the review of the OIS limit. He emphasized the importance of maintaining stable rules to avoid creating uncertainty in the market.
Patra also highlighted the exclusion of new 14-year and 30-year government bonds from the Fully Accessible Route (FAR), which is expected to drive demand for 5-year to 10-year bonds. This strategic move aims to enhance liquidity, improve price discovery, and reduce transaction costs as the volume of debt in this segment increases.
Foreign Portfolio Investment (FPI) in FAR securities has surpassed Rs 2.10 trillion, with foreign investments in the new 14-year and 30-year tenors now subject to the existing RBI limit. The existing FAR-designated debt securities in the 14-year and 30-year categories remain accessible to foreign investors in the secondary market.
V R C Reddy, head of treasury at Karur Vysya Bank, emphasized that the real demand lies in 5-year and 10-year papers, which justifies the decision to concentrate investments in this segment.
In conclusion, the RBI’s review of the investment limit for foreign investors in the OIS market reflects a proactive approach to managing market dynamics and ensuring liquidity and price discovery in the government bond market. Patra’s insights and strategic decisions are instrumental in shaping the future direction of the Indian financial market.