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Sunday, April 16, 2006

FII inflows into INR denominated debt

In recent days, I have written twice about debt inflows: about the RBI policy framework on debt inflows, and about SEBI's implementation of these policies. On 13 April, Andy Mukherjee has written a column on Bloomberg on these issues.

The policy alternative that is being discussed is that of removing all restrictions on FII purchases of INR denominated bonds (whether GOI or corporate), and having controls on foreign currency borrowing. The key question that Andy asks is: What's in it for India? My response would be in two pieces. First, the proposal is superior because it avoids the currency mismatch on the part of firms that's caused by the present framework. A shift to INR denominated debt is safer. Second, it will foster the development of a local bond market, which is an essential element of financial globalisation.


  1. There is an interesting article in today's The Hindu by C.R.L Narasimhan on the relationships between CAC and sovereign debt ratings by rating agencies (
    He seems to suggest that the lack of an investment grade rating will lead to a situation where domestic savings will chase better rated foreign currency paper (which has a better rating and lower risk profile) rather than local rupee debt paper (issued by both the government and corporates), leading to a situation where these domestic entities will have to compete for capital in the international markets leading to an incapacity on say the part of the government to complete its borrowing schedules...
    Is this a valid concern??
    Will CAC automatically lead to an upgrade in sovereign ratings so that the above mismatch dissapears?

  2. Hi, discovered your blog from blog search. I was trying to see what other bloggers have written about CAC after I did my post on it.

    As someone in earlier post did mention about Ila Patnaik's view on CAC in her column in IE. I could only agree with the over exposure of short term debts of our banks.

    This comment might not be related to your present post. I will be coming more often here.

  3. I think every one outside the government understands the importance of having an INR dominated debt market. I think its necessary for the development of Indian bond market. As Andy has pointed out that Indian banks have lent more than they received as deposit. The money came from cutting their investment in government bonds. Government is also planning to cut mandatory requirement for banks to invest 25 percent of their deposits in approved government securities. In this case more and more players will be required in the bond market and allowing FIIs will be a good idea. But government doesn’t seem to agree too much. It is increasing the limits, a little too slow, which is difficult to understand.

  4. hey!
    have finally decided to write my own eco based blog! the inspiration, ofcourse, comes from you!! :)
    these ideas always happen in the middle of endsem examinations dont they!!

    please do visit sometime. i plan to be fairly regular!




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