At a time when the government and RBI are working overtime to boost dollar inflows, a report today said lifting the cap on FII exposure in government bonds can net in around USD 40 billion over the next one year.
The removal of restriction in FII investment in government securities (G-secs) will make India eligible for inclusion in the JP Morgan's Government bonds-emerging markets index, a popular index among emerging market investors, StanChart said in a report.
"If India were included into this index, we would expect it to have a 10 per cent index weight. We think this would attract USD 20-40 billion of foreign inflows to Government securities over a year, and result in foreign outflows from Turkey, Indonesia, Thailand and Hungary."
Currently, the Government has capped the FII exposure to G-secs at USD 30 billion which was half of that last till fiscal.
The report comes at a time when the Government is grappling with containing current account deficit (CAD), which had touched a historic high of 4.8 per cent of GDP.
The high CAD is being blamed for the plight of rupee, which till the new RBI Governor took charge last week, had lost nearly 28 per cent of its value this fiscal. The rupee has clawed back a good 7 per cent in five trading sessions since September 4.
The report said the inclusion of India into this global index will encourage Government bond buying by a wide variety of investors, including those with a long-term investment horizon. At present a whopping 98 per cent of outstanding G-Secs are held by domestic investors, mostly banks and insurers.
India's inclusion in the index will ease market concerns over funding the trade gap, it said.
"We believe index inclusion would be a significant step in both attracting sustainable foreign debt inflows and deepening the G-Sec market."
"Widening the investor base to include those with risk -return preferences different from domestic investors would deepen the Government securities market," the report said.