RBI expands FAR universe for FPIs to boost capital inflows

Mumbai: The Reserve Bank of India (RBI) has thrown open a wider section 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 said may 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 amid a narrowing interest-rate differential with the US and heightened global uncertainty. Net foreign debt inflows slowed to just $0.5 million in the April-June quarter, compared with 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, FAR was designed to facilitate greater foreign participation in India’s sovereign debt market by exempting designated securities from investment ceilings.

Under the revised framework, all new 15-year, 30-year and 40-year issuances would be eligible under FAR. The RBI also extended the framework to future sovereign green bond issuances across six maturities and designated three existing securities — 6.68% GS 2040, 7.24% GS 2055 and 7.71% GS 2066 — as FAR-eligible.

Additionally, the central bank has dismantled several longstanding restrictions governing investments by foreign portfolio investors (FPIs) under the general route. The central bank has removed the requirement for foreign investors to comply with short-term investment limits, security-wise limits and concentration limits when investing in government securities.

Earlier, FPIs were subject to a short-term investment limit that capped investments in securities with residual maturity of up to one year, at 30% of their holdings. Foreign investors were also restricted from collectively holding more than 30% of any individual government security and faced concentration caps linked to overall investment limits. These provisions have now been withdrawn.

The RBI has also simplified the investment limit structure by merging the separate ‘general’ and ‘long-term’ investment categories into a single limit for government bonds and state bonds.

Under the revised framework, the aggregate investment limit for government bonds has been fixed at ₹4.62 trillion for April-September 2026 and ₹4.77 trillion for October 2026-March 2027, while limits for state bonds have been set at ₹1.53 trillion and ₹1.64 trillion, respectively.

“This in turn will help in making government bonds more attractive to foreign investors and improving demand for long term tenor paper. This will push investment in India’s debt market,” Bank of Baroda’s economic research team said in a note on 5 June.

Yield on the 10-year benchmark government bond 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 can see a further fall of 5 basis points, Rajeev Pawar, treasury head at Ujjivan Small Finance Bank, said.

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,” V.R.C. Reddy, treasury head at Karur Vysya Bank, said.

According to Vijay Kuppa, chief executive officer at InCred Money, while the measures are a right step directionally to attract foreign flows, the narrower interest rate differential between the US and Indian benchmark yields may offer limited help in the near term, although they do provide a much needed boost to investor sentiment.

Beyond expanding FAR, the RBI has dismantled several longstanding restrictions governing FPI investments under the general route. The central bank has removed the requirement for foreign investors to comply with short-term investment limits, security-wise limits and concentration limits when investing in government securities.

Removal of these restrictions is one of the most consequential changes in the framework. Earlier, FPIs were subject to a short-term investment limit that capped investments in securities with residual maturity of up to one year at 30% of their holdings. Foreign investors were also restricted from collectively holding more than 30% of any individual government security and faced concentration caps linked to overall investment limits. These provisions have now been withdrawn.

The RBI has also simplified the investment limit structure by merging the separate ‘general’ and ‘long-term’ investment categories into a single limit for government bonds and state bonds. Under the revised framework, the aggregate investment limit for government bonds has been fixed at ₹4.62 trillion for April-September 2026 and ₹4.77 trillion for October 2026-March 2027, while limits for state bonds have been set at ₹1.53 trillion and ₹1.64 trillion, respectively.

“This in turn will help in making government bonds more attractive to foreign investors and improving demand for long term tenor paper. This will push investment in India’s debt market,” Bank of Baroda’s economic research team said in a note on 5 June.

Yield on the 10-year benchmark government bond opened at 6.99% on Friday and quickly fell to 6.97% after the announcement. On Friday, it ended at 6.97% as against 6.99% on Thursday.

The 10-year can see a further fall of 5 basis points, Rajeev Pawar, treasury head at Ujjivan Small Finance Bank said.

Market participants cheered the move and expect it to support the government’s borrowing programme by increasing demand for longer-tenor 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,” VRC Reddy, treasury head at Karur Vysya Bank said.

Between April-June, FII debt flows had weakened to $0.5 million after inflows of $2.8 billion in FY26 and strong inflows of $14.2 billion and $17.3 billion in FY24 and FY25, respectively.

While the measures are a right step directionally to attract foreign flows, the narrower interest rate differential between the US and Indian benchmark yields may offer limited help in the near term but they do provide a much needed boost to investor sentiment, Vijay Kuppa, chief executive officer at InCred Money said.