Foreign portfolio investors stepped up purchases of Indian government securities after the centre and RBI synchronously announced measures to attract foreign capital inflows.
Since the announcement last week, FPIs bought ₹11,087 crore worth of government securities through the fully accessible route (FAR). So far in June, a net purchase of Rs 15,895 crore was made in government bonds- highest in 15 months. FPI holdings in government securities stood at ₹3.39 lakh crore before the market closed on Friday.
On June 5, the government announced the removal of tax on capital gains and interest income earned by FPIs with effect from April 1. The head bank also unveiled a series of measures, including expanding the universe of government securities eligible under the FAR and introducing forex swap measures for overseas borrowings and FCNR deposits, among others.
The Indian Rupee appreciated following the announcement, while the yield on the benchmark 10-year government bond declined 10 basis points to 6.89%.
Meanwhile, in an concessional move the RBI announced to provide banks with a cheaper source of funding at a time when deposit mobilisation remains a challenge and credit demand continues to outpace deposit growth.
In a circular issued last week, the central bank said the OFCB swap facility is available to all Authorised Dealer Category-I banks, including private sector lenders, for overseas foreign currency borrowings with a minimum maturity of three years. The restriction limiting participation to public sector entities applies only to the external commercial borrowing (ECB) component of the scheme. The swap will be undertaken at a fixed rate of 1.5 per cent per annum, compounded semi-annually, and the window will remain open until December 31, 2026. Hedging costs in the market are estimated at around 3.5-4 per cent, implying a reduction of 200-250 basis points under the RBI’s concessional swap arrangement.
“On a conservative estimate, in FY27, under the OFCB window, banks may borrow $5 billion-$8 billion,” the State Bank of India said in a report. “With sluggish domestic deposit growth limiting the ability to fund credit demand, the OFCB window may help banks access funds at rates that are 40-50 bps cheaper than domestic deposit card rates of similar maturity,” an excerpt form a report revealed.