A second major change announced in the Union Budget relates to allowing non-resident investors i.e. foreign investors (not NRIs as media reported) to freely invest in special category of government securities. This is a step aimed at inclusion in global bond indices. 1/n
This was an issue that was discussed at the Bloomberg conference attended by PM Modi in NY in Sept. Global bond indices represent trillions of US dollars of "sticky" money. Being included in the indices, therefore, would provide a cheap & stable source of foreign capital. 2/n
The catch is that global bond indices insist that there should be no restriction of entry/exit from a market. So, simplest way to gain inclusion would have been to remove the 6% limit of FPI holdings. However, that would expose the Indian economy to the Impossible Trinity 3/n
One way to out of the dilemma was to exploit a characteristic of global bond indices: it is the bond and not the country that is given weightage. This means the market need not be fully opened as long as specific bonds are fully open to international investors. 4/n
In other words, we can now issue special series government bonds that are open for global (& domestic) investors. Assuming that they meet size & liquidity criteria, they will be eligible for index inclusion and thereby provide access to this large & stable source of capital n/n
Post script: Most global indices include local currency issuance. Therefore a Rupee denominated bond will be eligible n+1/n
