The limit for FPI investments in Government securities in India has been part of the larger framework for capital account management. The risks of sovereign borrowing in foreign currency, the “original sin”, have been extensively analysed over the years, particularly after the Asian crisis in the nineties.
The concerns relating to sudden stops, however, are as relevant for domestic currency denominated debt as foreign currency debt. It is therefore imperative to balance the benefits of lower yields in normal times and the costs associated with increased volatility and yield impact in crisis times. 25.