Graphic: Mint
Graphic: Mint

RBI woos foreign investors with new relationship terms

Long-term funds that have an appetite and were waiting in the wings to pick up dirt-cheap stressed Indian debt will likely say yes

Amid the exodus of foreign investors from India, the Reserve Bank of India (RBI) has asked for a commitment of staying invested a minimum three years in local debt from them. In exchange, it has offered unbridled access to local derivatives market and its own liquidity facilities. Are the incentives good enough? Foreign investors can hedge their investments for both currency and interest rate risk the way they want. And they have to commit 67% of their investment, whittling down their commitment by a maximum of 33%, giving them flexibility to manage their gains or losses.

The best part is that the relationship will be voluntary, which is why it’s called the “Voluntary Retention Route". In short, RBI has, like a gentleman, left the decision to investors. There will be a due selection process through an auction as well.

Long-term funds that have an appetite and were waiting in the wings to pick up dirt-cheap stressed Indian debt will likely say yes. The dollars, if they come, could resurrect India’s infrastructure dream, currently dead under a pile of overleveraged botched decisions of the past. Many are doing the rounds of insolvency courts while some are gasping for investor money.

Perhaps junk bond specialists could find the idea of picking toxic debt of Indian companies compelling. But for foreign investors who see merit in committing funds, the carrot of access to local derivatives is not a juicy one. Domestic interest rate swaps have witnessed thinning volumes and even currency derivatives are not that transparent. Hedging won’t be a smooth sail. Even so, it gives them enormous freedom in terms of hedging products.

The terms of investment will be set by RBI and that gives the central bank lot of power.

What is certain is that fickle-minded portfolio investors that have been fleeing the country’s debt markets are unlikely to take a bite of this proposal. They have pulled out close to $10 billion from bonds so far this year and may continue to exit.

The last thing this measure is likely to do is support a battered rupee. The rupee is caught in a hailstorm of currency market turmoil and this measure is nothing but an ineffective umbrella.

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