An autonomous research institute under the Ministry of Finance


Foreign Investment in the Indian Government Bond Market

Publication date

Sep, 2013


NIPFP Working Paper No. 126


Ila Patnaik, Sarat Malik, Radhika Pandey, Prateek.


A country witnesses currency exposure when locals hold a large amount of unhedged foreign currency denominated debt. However, India's capital controls continue to be guided by concerns about debt and its maturity, rather than its currency denomination. Even though the there is foreign appetite for rupee denominated debt, India has placed many restrictions on foreign investment in rupee denominated bonds. These include caps on the total as well as limits by investor class, maturity and issuer and have been implemented through a complicated mechanism for allocation and reinvestment. This paper presents the logic and rationale for why these restrictions fail to meet the objectives of economic policy today. It recommends removal of quantitative restrictions on foreign holding of Indian rupee denominated debt and suggests ways to move to a more effcient framework.

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