MUMBAI: Foreign investors bought a record $3 billion of Indian government bonds in June, their highest monthly inflow, as the Asian nation’s decision to scrap taxes fueled a buying spree and boosted hopes for inclusion into a major global index.
These investors bought a net of nearly $3 billion of government bonds under the Fully Accessible Route (FAR) this month, clearing house data showed.
That compares with a net purchase of about $1.7 billion in the January–May period.
Earlier this month, New Delhi exempted foreign investors from the 12.5% long-term capital gains tax and scrapped a 20% withholding tax on bond interest income.
At the same time, the Reserve Bank of India broadened the pool of securities eligible under the Fully Accessible Route to include longer-dated sovereign debt.
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“The removal of taxation on Indian government bonds will mechanically make them more interesting for global investors and will help redirecting flows towards the onshore market,” said Niel Clement, a portfolio manager for emerging market fixed income, BNP Paribas Asset Management.
Measures taken by India are viewed as a positive step towards India’s inclusion in the Bloomberg Global Aggregate Bond Index.
Jennifer Taylor, head of emerging market debt, systemic fixed income, State Street Investment Management, said inclusion in the Bloomberg index now appears to be on the horizon as removing the tax element will ease some of the operational frictions for investors.
A plunge in oil prices has further aided sentiment toward Indian debt, compounding the impact of New Delhi’s policy measures. Brent crude tumbled over 20% this month, retreating to pre-Iran war levels.
“The reforms are bearing fruit, with inflows picking up,” said Lavanya Venkateswaran, executive director and senior ASEAN and India economist at OCBC Bank, adding that she expects more inflows on decisive policy action and easing of some external headwinds.
Treasury bills
Meanwhile, treasury bills too have witnessed record purchases from foreign investors this month.
Foreign investors now own 125 billion rupees of the nation’s treasury bills, with almost all the buying witnessed in June.
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