Recently, The Reserve Bank of India (RBI) announced the introduction of a unique channel known as the Fully Accessible Route (FAR). Effective from April 1, this initiative allows non-residents to invest in specified Indian government dated securities. A decision that follows the Union Budget’s announcement that certain categories of government securities will be unrestricted and entirely open to non-resident investors.
Definition of ‘Specified Securities’ and Eligibility
According to the RBI, ‘specified securities’ are periodically identified Government Securities for investment under the FAR route. All new issuances of Government securities (G-secs) with tenors of 5-year, 10-year, and 30-year will be eligible for investment as specified securities. Crucially, non-resident investors face no investment ceilings when investing in specified government securities.
Existing Routes Operating Alongside FAR
The FAR scheme operates alongside two current routes: The Medium Term Framework (MTF) and The Voluntary Retention Route (VRR). Introduced in October 2015, the MTF caters to Foreign Portfolio Investment (FPI) in Central Government Securities (G-secs) and State Government Securities (SDLs). FPI involves securities and other financial assets passively held by foreign investors. The VRR route encourages Foreign Portfolio Investors to make long-term investments in Indian debt markets.
Benefits of the FAR Scheme
The FAR scheme offers several advantages. In particular, it eases non-residents’ access to Indian government securities markets and may facilitate India’s inclusion in global bond indices. Entry into these indices can attract substantial funds from large global investors like pension funds, resulting in a steady inflow of foreign investment in government bonds.
Understanding Government Securities (G-Secs)
Government Security, or a G-Sec, is a tradable instrument issued by the Central or State Governments of India. It signifies the Government’s debt obligations. These securities can be short-term (known as treasury bills with original maturities less than a year) or long-term (referred to as Government bonds or dated securities with original maturity of one year or more). In India, both types of securities are issued by the Central Government, while the State Governments only issue bonds or dated securities, known as the State Development Loans (SDLs).
Risk-Free Gilt-Edged Instruments
G-Secs are deemed virtually risk-free and are therefore called risk-free gilt-edged instruments. These high-grade investment bonds are offered by governments and large corporations to borrow funds. The low risk-proposition associated with these instruments makes them a viable choice for a stable portfolio.