RBI expands FAR universe for FPIs to encourage capital inflows | Today’s news
Mumbai: The Reserve Bank of India (RBI) has opened a wider part of the government bond market to foreign investors, easing investment restrictions and expanding the pool of securities available under the fully accessible route (FAR) – a framework that allows foreign investors to buy designated government bonds – in a bid to revive overseas debt inflows, which experts say could support the government’s borrowing programme.
The sweeping changes announced on Friday come at a time when foreign investment in Indian debt has slowed sharply due to a narrowing interest rate differential with the US and heightened global uncertainty. Net external debt inflows slowed to just $0.5 million in the April-June quarter, compared to inflows of $2.8 billion in FY26 and $14.2 billion and $17.3 billion in FY24 and FY25, respectively. data from JM Financial Institutional Securities showed.
Introduced in 2020, the FAR was designed to facilitate greater foreign participation in the Indian government bond market by exempting specified securities from investment caps.
Under the revised framework, all new 15-year, 30-year, and 40-year issues would be eligible under the FAR. The RBI also extended the framework to future sovereign green bond issues in six maturities and designated three existing securities — 6.68% GS 2040, 7.24% GS 2055 and 7.71% GS 2066 — as eligible for FAR.
In addition, the central bank lifted several long-standing restrictions governing investments by foreign portfolio investors (FPIs) under the general procedure. The central bank abolished the requirement that foreign investors observe short-term investment limits, security limits and concentration limits when investing in government securities.
Earlier, FPIs were subject to a short-term investment limit that limited investments in securities with residual maturity within one year to 30% of their holdings. Foreign investors were also not allowed to collectively hold more than 30% of any individual government securities and faced concentration caps linked to overall investment limits. These provisions have now been repealed.
The RBI has also simplified the structure of investment limits by merging the separate categories of ‘general’ and ‘long-term’ into a single limit for government bonds and government bonds.
According to the revised framework, an aggregate investment limit for government bonds was set at ₹4.62 trillion for April to September 2026 and ₹4.77 trillion for October 2026 to March 2027, with government bond limits set at ₹1.53 trillion and ₹1.64 trillion, or
“This, in turn, will help make government bonds more attractive to foreign investors and improve demand for long-term tenor paper. This will boost investment in the Indian debt market,” Bank of Baroda’s economic research team said in a June 5 note.
The yield on the benchmark 10-year Treasury note opened at 6.99% on Friday and quickly fell to 6.97% after the announcement. It also ended the day at 6.97% compared to 6.99% on Thursday.
The 10-year yield may see a further decline of 5 basis points, said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.
Market participants cheered the RBI’s move. “The 10-year benchmark yield is likely to find support around 6.9% and could move towards 7.1% as markets reassess the policy outlook closer to the next MPC meeting,” said VRC Reddy, head of treasury at Karur Vysya Bank.
According to Vijay Kuppa, CEO of InCred Money, while the measures are the right move to attract foreign flows, the narrower interest rate differential between US and Indian benchmark yields may offer limited help in the near term, although they provide much-needed support to investor sentiment.
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Apart from the extension of FAR, the RBI has lifted several long-standing restrictions governing FPI investments under the general route. The central bank abolished the requirement that foreign investors observe short-term investment limits, security limits and concentration limits when investing in government securities.
The removal of these restrictions is one of the most consequential changes to the framework. Formerly, FPIs were subject to a short-term investment limit that limited investments in securities with residual maturity within one year to 30% of their holdings. Foreign investors were also not allowed to collectively hold more than 30% of any individual government securities and faced concentration caps linked to overall investment limits. These provisions have now been repealed.
The The RBI has also simplified the structure of investment limits by merging the separate categories of ‘general’ and ‘long-term’ into a single limit for government bonds and government bonds. According to the revised framework, an aggregate investment limit for government bonds was set at ₹4.62 trillion for April to September 2026 and ₹4.77 trillion for October 2026 to March 2027, with government bond limits set at ₹1.53 trillion and ₹1.64 trillion, or
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“This, in turn, will help make government bonds more attractive to foreign investors and improve demand for long-term tenor paper. This will boost investment in the Indian debt market,” Bank of Baroda’s economic research team said in a June 5 note.
The yield on the benchmark 10-year Treasury note opened at 6.99% on Friday and quickly fell to 6.97% after the announcement. It ended at 6.97% on Friday, compared to 6.99% on Thursday.
In 10 years, there could be a further decline of 5 basis points, said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.
Market participants cheered the move and expect it to support the government’s borrowing program by increasing demand for longer-maturity bonds, improving market liquidity and potentially lowering borrowing costs over time.
“The 10-year benchmark yield is likely to find support around 6.90% and could move towards 7.10% as markets reassess the policy outlook closer to the next MPC meeting,” said VRC Reddy, head of treasury at Karur Vysya Bank.
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Between April and June, FII debt flows weakened to USD 0.5 bn following inflows of USD 2.8 billion in FY26 and strong inflows of USD 14.2 billion and USD 17.3 billion in FY24 and FY24, respectively.
While the measures are a step in the right direction to attract foreign flows, the narrower interest rate differential between US and Indian benchmark yields may offer limited help in the near term, but they provide a much-needed boost to investor sentiment, said Vijay Kuppa, CEO of InCred Money.
