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Foreign Participation In G-Secs

IAS Current Affairs

Foreign Participation In G-Secs

Source: PIB
GS III: Investment Models

Overview

  1. News in Brief
  2. Key Reforms Introduced
  3. Significance of the reforms

Why in the News?

The Government of India has introduced a series of reforms to increase foreign participation in Government Securities (G-Secs).

News in Brief
  • India has undertaken significant reforms to attract foreign investors to its Government Securities (G-Secs) market.
  • To strengthen India’s bond market and integrating with global financial markets.
  • This facilitates long-term capital inflows into the Indian economy.
Key Reforms Introduced

Tax incentives for Foreign Investors – FIIs/FPIs

        • Exemptions on interest income on specified G-Secs.

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        • Relief on Long-Term Capital Gains (LTCG).
        • Relief on Short-Term Capital Gains (STCG).

Expansion of Fully Accessible Route (FAR)

        • More Government Securities have been brought under the Fully  Accessible Route, broadening investment opportunities for foreign investors across a wider range of G-Secs.
        • Eligible securities can be purchased by foreign investors without investment limits.

Streamlined Investment Norms

        • Procedures related to registration, compliance, and investment operations have been streamlined.

Relaxation of Investment Limits

        • To facilitate greater participation of Foreign Portfolio Investor (FPI) participation in G-Secs, the Government has removed limits on short-term investment, concentration and security-wise investment.
Significance of the reforms

By broadening and diversifying investor base,

  • Attract stable long-term capital
  • Deepen the G-sec market
  • Strengthen India’s debt market

Greater foreign participation,

  • Provide an additional source of funding for infrastructure, urban development, manufacturing, climate initiatives, and other national priorities.
  • Improve market liquidity and price discovery.
  • Support the development of a smoother yield curve.
  • Reduce government borrowing costs.
  • Strengthen financial market benchmarks.
  • Enhance the transmission of monetary policy across the economy.

Institutional Investors

  • Attract institutional investors such as pension funds, insurance companies, and sovereign wealth funds, leading to more stable and sustained capital flows.
  • Boost foreign exchange inflows and strengthen the resilience of India’s financial markets.

Key Terms Explained

  • Government Securities (G-Secs) – Sovereign Debt Instruments issued by the Government of India to raise funds for public expenditures and manage the national budget.
  • Foreign Portfolio Investor (FPIs) and Foreign Institutional Investor (FIIs)- methods used by non-residents to invest in Indian securities.
  • Yield Curve – Represents the relationship between bond yields and their maturity periods and serves as an important indicator of market expectations.
UPSC Prelims Practice Question

Consider the following statements regarding the Fully Accessible Route (FAR):

  1. It allows foreign investors to invest in specified government securities without investment limits.
  2. Introduced to deepen India’s bond market and attract foreign capital.
  3. Only, domestic institutional investors can purchase eligible government securities.

Which of the statements given above is/are correct?

a) 1 and 2 only

b) 2 and 3 only

c)1 and 3 only

d) 1,2,and 3

Answer: a) 1 and 2 only

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