India Exempts Foreign Sovereign Bonds from Regulatory Cap

Source: Bloomberg

India’s central bank said foreign sovereign bonds are exempted from the restrictions imposed on holdings of securities unlisted in the country, caving into requests of local lenders.

• The Reserve Bank of India said foreign sovereign bonds are not included in the 10% cap on holdings of securities that are not listed in India.
• The RBI earlier this month ordered banks to lessen activities that would breach the 10% limit.
• Banks started to boost trades in March when some hit exposures over $1 billion through regulatory loopholes that convert rupee deposits into dollars by a buy-sell swap.
• Proceeds from the swap were then used to acquire US debt, with banks gaining from the arbitrage.
• Analysts believe the decision will drive the resumption of trading once paying picks up in the dollar/rupee swap market.
• The 12-month yield on forward dollar-rupee rates fell to 4.22% on Tuesday as lenders resumed swaps.