The recent announcement that India’s local-currency bonds will not be included in the JP Morgan GBI-EM Global Diversified Index for the time being will have limited macro and market impact, according to an economist.
“Speculation that India’s inclusion in the bond index was imminent has not led to any notable pick-up in inflows. Therefore, it is unlikely that the snub means a sharp reversal,” Shilan Shah, Senior India Economist at Capital Economics, said in a note.
The decision to hold off from adding Indian bonds to the index centres mainly on technical issues that need resolving and could “dent the pride of the government, for which bond index inclusion has long been an explicit policy aim”, he said.
The government will now presumably redouble efforts to iron out these issues, Shah said.
JPMorgan retained the country’s bonds on its watch list last week, defying expectations that the Indian bonds would be added to the index. Earlier this month, the London Stock Exchange Group that manages the FTSE indices had said that it would continue to keep Indian bonds under watch for inclusion into the FTSE Emerging Markets Government Bond Index.
Going ahead, the bigger determinant of Indian bond yields will be the outlook for domestic and global monetary policy, the economist said.
With developed market central banks in a hawkish mood and the Reserve Bank of India also likely to tighten by a bit more than the consensus expects, there is scope for a further small rise in the 10-year local bond yields over the next three to six months, Shah said.
Bond yields should fall back next year as growth comes off the boil, inflation gradually eases and the RBI and other central banks, including the Federal Reserve, take their feet off the brakes.
There is not much evidence to suggest that inclusion in bond indices has a major impact on local financial markets, the economist said.
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