What are Fully Accessible Route (FAR) bonds

Introduction

In a landmark development for India’s debt market, on June 28, 2024, JP Morgan added 29 Indian government securities under the FAR program to its highly regarded Emerging Market Bond Index (EMBI). This development is expected to enhance foreign investor participation and attract substantial inflows into the Indian bond market. The decision marks India’s debut in the global bond index, reflecting growing confidence in the country’s economic resilience and financial reforms. A prominent concept drawing interest during this transition is the Fully Accessible Route (FAR) bonds. It was primarily introduced to provide foreign investors with unrestricted entry, playing a vital role in India’s efforts to open up its debt market and foster global financial integration. By allowing non-residents to invest in specific government securities without any investment caps, FAR bonds have played an instrumental role in improving the appeal and accessibility of Indian bonds to international investors. This article explores the specifics of FAR bonds, their role and significance in India’s bond market.

The Origin Story

To clarify, FAR isn’t exactly a type of bond but rather a framework that allows non-residents (those residing outside India) to invest in specific government securities, known as “specified securities,” without facing any restrictions. Once designated as specified securities, they remain eligible for investment under FAR until maturity. The RBI may periodically adjust or introduce new securities and tenors to be included as specified securities under the FAR framework.

In March 2020, as part of a broader strategy to deepen the Indian bond market and attract foreign investments, the RBI introduced the FAR. This move was part of India’s ongoing efforts to liberalize its financial markets while ensuring stability and transparency. FAR was created to allow non-residents unrestricted access to specific g-secs, which were earlier subject to Foreign Portfolio Investor (FPI) limits. This liberalization was not just a technical adjustment but a statement—a signal that India was ready to open its doors wider to global investors.

Why FAR Bonds Matter

FAR bonds play a unique and important role in India’s integration with global financial markets. By removing caps on foreign investments, the FAR initiative aims to bring greater liquidity into India’s bond market. The current global context further underscores India’s appeal. With Russia becoming an unviable investment option and China facing its own market challenges, capital flows into emerging markets are seeking more stable opportunities. India stands out with its government bond yields around 7%, nearing the peak of interest rates, coupled with low foreign exchange volatility. This positions India as an attractive destination for global investors, particularly those looking for higher yields in relatively stable markets.

For international investors, FAR bonds serve as a strategic entry point. Initially, many foreign investors prefer to start with risk-free government securities to gain a foothold and assess the country’s macroeconomic stability. Once they feel confident in India’s economic landscape, they often expand their portfolios into public sector and government-owned enterprises before eventually exploring corporate bonds. This natural progression highlights India’s broader investment potential, not just in government securities but across a wide spectrum of financial assets. The RBI’s initiative aligns with the country’s long-term vision of becoming a more active player in the global financial system, reducing its reliance on domestic funding sources, and attracting a steady inflow of foreign capital. With FAR bonds providing foreign investors’ unrestricted access to India’s bond market, the nation is positioning itself as a credible investment destination not only for equities but also for fixed-income investments.

Recent Trends in FAR Bonds

The inclusion of government securities under the Fully Accessible Route in the JP Morgan EMBI marks a significant milestone for India’s bond market. This development is projected to attract an estimated USD 25-30 billion in foreign inflows, driving up demand for Indian government bonds and enhancing their global appeal.

Foreign Portfolio Investments in debt securities has already seen notable growth. As of September 12, 2024, FPI investments in debt securities for the fiscal year 2023-24 stood at INR 121,059 crores, with an additional INR 53,741 crores for FY2024-25, bringing the cumulative total to INR 174,800 crores (Source: NSDL). This reflects increasing global interest in Indian bonds, fueled by their accessibility and potential for attractive returns. Furthermore, FAR bonds are set to gain even more global traction with their inclusion in the Bloomberg Emerging Market (EM) Local Currency Government Index starting January 2025. This move is expected to expand global investor participation, further underscoring the significance of FAR bonds in India’s evolving debt market.

The Road Ahead

As India continues to strengthen its bond market and integrate with global financial systems, the FAR program is likely to play an even more critical role. For investors, FAR bonds represent a dual advantage: access to India’s robust growth story and the potential for high yields. As global interest rates fluctuate, emerging market bonds like India’s FAR offer a compelling case for portfolio diversification. Additionally, as India’s economic reforms gain momentum, these bonds stand as a testament to the country’s financial evolution—opening doors to a wider array of global investors while fostering long-term growth. Furthermore, the FAR program is just a spearhead introduction of Indian fixed income for foreign investments. In years to come we anticipate investors moving down the credit curve and invest in bonds issued by PSUs, Banks, Private corporates as natural progression of investment into India.

FAQs

Q. What are FAR Bonds?

A. FAR Bonds refer to Indian government securities designated under the Fully Accessible Route, which allows foreign investors unrestricted access to invest in these bonds without any investment caps. The RBI introduced this route in March 2020 to increase foreign participation in India’s bond market.

Q. Who can invest in FAR Bonds?

A. Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and other entities permitted by the RBI can invest in government securities under the FAR route.

Q. What role do Sovereign Green Bonds play in the FAR initiative?

A. In 2023, the RBI designated Sovereign Green Bonds issued by the Government for FY2022-23 as eligible for investment under FAR. This reflects India’s push toward sustainable finance, catering to global investors seeking environmentally-conscious investment opportunities.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.