MUMBAI: Bonds rose after the government and the Reserve Bank of India announced measures to encourage foreign investment in government securities on Friday. Yields on benchmark 10-year government securities (G-Secs) fell to 6.94% in early trading, from 6.99% on Thursday, after the government said foreign portfolio investors (FPIs) would be exempt from long-term capital gains and tax deductions on interest from G-Secs.
Bond prices and yields move in opposite directions.According to Ramkamal Samanta, Chief Investment Officer, Star Union Dai-ichi Life Insurance, the abolition of LTCG tax and removal of withholding tax on interest income for FPI investments in G-Secs, along with listing of 15, 30 and 40-year notes through the Full Access Route (FAR) securities universe with no investment limit, is positive for the Indian fixed income market in the medium term.
Until now, FPIs were allowed to invest in G-Secs for 10 years under the FAR mechanism. The government on Friday also raised the concentration limit and security limit for investments by FPIs in G-Secs, a statement said.“The decisions are aimed at attracting more foreign inflows through key index inclusion channels,” Samanta said. “However, in the near term, the market is likely to be more influenced by global yield movements and domestic inflation dynamics.”
However, the stock market was upset by the government’s decision to liberalize FDI investments in the sovereign bond sector while equity investment rules remained unchanged. As a result, the Sensex closed 117 points lower at 74,243, with foreign funds net selling in stocks on Friday at Rs 8,776 crore, stock market data showed.