“This is key step towards structurally lowering the cost of capital in India. This is crucial for both infrastructure as well as the competitiveness of Indian industry. However, the biggest beneficiary is the government as it directly impacts its cost of borrowing,” Sanyal wrote on Twitter.
The Reserve Bank of India on Monday notified the ‘Fully Accessible Route’, under which eligible investors can invest in specified gilts without being subject to any investment ceilings starting Wednesday. Sanyal wrote that the reason that India did not simply increase the foreign portfolio limit is because global bond indices require that there should be no capital controls at all and India is not prepared to remove all the limits because of the impossible trinity problem.
The impossible trinity theory states that it is not possible for a country to maintain a stable exchange rate, free capital movement and an independent monetary policy at the same time. A country must choose two out of these three objectives. “However, we realised that GBIs (global bond indices) give weights to certain bonds, not to countries. This meant that we could be eligible by opening up certain bonds while retaining controls on rest of the market,” he wrote.
Finance Minister Nirmala Sitharaman had proposed in the Union Budget for 2020-21 (Apr-Mar) to liberalise investment limits on certain categories of government securities for non-resident investors, which was among the proposals announced by the government in the Budget to increase participation in government bonds.