As India seeks greater inflow of foreign investments, the Reserve Bank has cautioned against 'investment tourists' in the domestic debt market saying that they can withdraw funds at a "whiff of trouble".
RBI Executive Director G Padmanabhan said that with regard to foreign investment in domestic financial markets, the central bank's policy has been to increase access in a calibrated and gradual manner.
He said the advantages of widening and diversifying investor base which improves demand for government bonds, need to be kept in view along with the considerations about financial stability arising from sudden-stop and reversal risks.
"These risks manifested during the taper tantrum... However, the financial stability implication of 'investment tourists' exiting at a whiff of trouble has always to be kept in mind as we progress along the path of liberalisation" he said at the Annual Meet of Primary Dealers Association of India.
Indian markets, he said were liquid enough to enable large transactions in an orderly fashion and this is one of the factors that inspired confidence among global investors and influenced their return.
Padmanabhan said it may be worthwhile to comprehensively debate on the issuance of sovereign bonds abroad either in rupee or foreign currency vis-a-vis enhancing the limits domestically for international investors including the pros and cons of joining various emerging market indices.
He said there are proposals for allowing international settlements of Indian government bonds through global securities settlements systems like Euroclear.
Such settlements, he said, could potentially improve acceptability and attractiveness of Indian bonds among foreign investors.
"...One needs to be conscious of the downside risks such as liquidity getting fragmented as some of the FPIs presently operating in India may like to move off-shore and development of a parallel Government securities yield curve outside India [creating yet another NDF-like market overseas with all the attendant issues]," Padmanabhan added.
He further said, the government is committed to fiscal correction path and fiscal consolidation but challenges abound for the bond traders and markets.
Going forward, the gross bond supply would remain elevated even after fiscal consolidation as the government is likely to continue running fiscal deficits in the foreseeable future due to the accumulated debt stock that needs to be rolled over as also the growing GDP, he added.
