Rama Mohan Rao Amara, a senior executive at SBI, has endorsed the recent capital gains relief for Foreign Portfolio Investors (FPIs) on government securities, describing it as a 'very helpful measure'. This development is expected to attract more foreign investment into Indian debt markets, although immediate impacts on bond yields may be limited due to prevailing inflation concerns.
Amara highlighted that while the capital gains relief could channel more foreign money into government securities, the trajectory of inflation will significantly influence how quickly bond yields might adjust. He emphasized a broader package of measures aimed at anchoring inflation expectations, including steps on FCNR(B) deposits and external commercial borrowings, as well as the RBI's efforts to absorb swap costs to ease the burden on incoming foreign funds.
Despite the potential for increased foreign investment, Amara noted that net FPI flows have been negative for the past two months. He believes that reversing this trend could stabilize the rupee and gradually bring down bond yields. Amara also pointed out that the real challenge lies in changing investor sentiment rather than addressing foreign exchange reserves, which remain comfortable on an import cover basis.
“It is a very helpful measure.”
Rama Mohan Rao Amara, SBI
On the domestic front, Amara acknowledged the pressure on net interest margins due to rising deposit rates. SBI is focusing on retail deposit mobilization through its branch network rather than pursuing expensive wholesale funding. The bank remains selective about using certificates of deposit and commercial paper, with rates climbing in May. Amara reassured that SBI is well-positioned to manage these pressures, given its comfortable credit-to-deposit ratio and surplus securities holdings.
Amara's overall message is that the policy measures are directionally correct, with solid foundations in place. A shift in FPI sentiment could quickly alter the narrative for both the currency and bond markets.
“The moment there is a reversal of the trend, people will start looking at the structural strength of the Indian economy and it will be back to basics.”
Rama Mohan Rao Amara, SBI
Background
The recent capital gains relief for FPIs is part of a broader strategy to attract foreign investment and stabilize the Indian economy. With global capital flows influenced by high US interest rates and AI-linked opportunities, India's measures aim to enhance its appeal as an investment destination.
Looking ahead, the focus will be on monitoring inflation trends and FPI flows. A reversal in negative FPI trends could lead to a stronger rupee and lower bond yields, reinforcing the positive outlook for India's economic fundamentals.
