The inclusion of Indian sovereign bonds in global bond indices – the influential Emerging Markets Government Bond Index (GBI -EM) and the JP Morgan Global Index – could pave the way for inflows of bonds of $ 170 billion to $ 250 billion over the next decade. Mint analyzes:
How do these two indices work?
Investors are constantly looking for higher yields and eager to diversify their portfolios, and governments are increasingly considering various sources of funding for sovereign bonds. As such, being a part of global bond indices can help trigger index-linked entries. GBI-EM and Global Aggregate Index are benchmarks for emerging market debt funds, which monitor local currency bonds issued by governments in emerging countries. They include countries directly open to the foreign investor base and largely reject countries with explicit capital controls, a major reason why Indian government bonds are not included in the indices.
How will inclusion benefit India?
India has shown improved macroeconomic stability and the government is keen on economic growth focused on investment spending. With the Center keen to open India’s sovereign bonds to greater foreign participation, development would spur growth through investment by sparking index-linked inflows. The influx of foreign investment would push India’s balance of payments into a structural surplus and strengthen the rupee. It will also lead to lower cost of capital and easing of interest rates, which will lead to debt sustainability and thus help India maintain a quality rating.
What are investment ratings?
An investment grade or rating indicates that a municipal or corporate bond has a relatively lower risk of default, compared to other bonds and for which the yields are lower than those of lower quality bonds. Credit rating agencies set the lowest ranking of bonds to be classified as investment grade.
What actions has the Center taken recently?
Specified central government securities will be accessible to non-resident investors without restrictions, the finance minister said in the 2020 budget speech. In March 2020, the Reserve Bank of India opened a notified window under the name of fully accessible route. (FAR) under which the “specified securities” would remain qualified for investment under the FAR until maturity. All new issues of 5-year, 10-year and 30-year government securities from FY 21 will also be eligible for investment under the DSC as “specified securities”.
When can India join the bond indices?
Indian sovereign bonds have a good chance of being included in global bond indices in early 2022, Morgan Stanley said. With its inclusion, it would be able to attract a one-time index inflow of $ 40 billion in 2022-23 and $ 170-250 billion bond inflow over the next decade. This could flatten the curve of Indian government bonds by 50 basis points and help the rupee to appreciate by 2%. This would result in an advantage for Indian stock returns.
Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH.
Never miss a story! Stay connected and informed with Mint. Download our app now !!