The prospect of India joining the global bond index this year has prompted buying in a set of local securities.
The decision to include the South Asian country in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) could come as early as this month when operators meet to review the index’s composition.
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Morgan Stanley and Goldman Sachs expect India to be included in the index with 10% weightage by 2023, if a preliminary announcement is made this year. Meanwhile, Barclays said India could possibly be added to the Bloomberg Global Aggregate Bond Index as well.
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What inspired the conversation about inclusion?
The Indian government started considering listing its securities for inclusion in the global bond index by 2013. However, restrictions on foreign investment in Indian debt meant that the country would have to take several steps before its securities were eligible.
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In April 2020, the Reserve Bank of India introduced a set of securities free from any restrictions under a “fully accessible route” to foreign investors. This was seen as a middle way that helps balance India’s concerns of “hot money” outflows while completely opening up part of its securities to foreign investors.
What obstacles remain?
A major barrier to index entry is the ability to clear and settle Indian debt on an international platform like Euroclear.
This would require removing or reducing the capital gains tax paid by domestic investors.
An easier solution would be to settle the debt locally, which Reuters reported could be a preferred method for the government.
Which securities are expected to be listed?
The securities are likely to be selected for inclusion in the index under the “fully accessible route”. All new issues of government securities of 5 years, 10 years and 30 years tenors starting from 2020-21 are covered under it.
The data shows that foreign investors have started buying bonds in this category since last month.
How much inflow can we expect?
According to Morgan Stanley, passive inflows of around $30 billion are expected from India’s joining, but they will reduce in 10 months from the month of joining as the 10% allocation itself will be phased out.
Barclays expects an investment of $8 billion to $20 billion if India is included in the Bloomberg Global Aggregate Bond Index.
What does this mean for the Indian markets?
India’s fiscal deficit widened during the COVID-19 crisis and the government aims to reduce it to 6.4% of GDP in this financial year ending March 2023 from 6.9% last year.
Financing the budget means the government will borrow a record 14.31 trillion Indian rupees ($180.06 billion) in this fiscal year.
While inflows through global bond index entry will be comparatively less, they will add another source of demand for Indian securities.
Additionally, India’s monthly trade deficit is approaching a record low, said Madhavi Arora, chief economist at Emkay Global, making the move to explore new avenues for dollar inflows and the move “an opportunity to tap into global capital”. A good and safe way.”
Are there any downsides?
A bond index entry would also expose the Indian debt markets to greater volatility associated with passive flows that allocate capital based on a weighting assigned by the index provider.
Bank of Baroda Chief Economist Madan Sabnavis said volatility could turn out to be a “headache” for the RBI.
Sabnavis said any change in sentiment or broader events such as a sell-off by the Federal Reserve or a hike in interest rates will further weaken the Indian debt market as foreign investors start withdrawing their money.
This story has been published without modification in text from a wire agency feed.
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