JPMorgan's Sajjid Chinoy says bond index inclusion shouldn't alter RBI's FX strategy

The inclusion of Indian government bonds into JPMorgan’s indices is expected to lead to billions of dollars of inflows starting mid-2024.

The Reserve Bank of India (RBI) should not change its foreign exchange strategy in response to the inclusion of Indian government bonds in global indices, JPMorgan's Chief India Economist Sajjid Chinoy has said.

Speaking to CNBC-TV18 on September 22, hours after JPMorgan announced that Indian sovereign debt will become a part of its Government Bond Index-Emerging Markets index suite starting June 2024, Chinoy said the biggest lesson for India from the taper tantrums of 2013 was that "buffers matter".

"I think the RBI's strategy, in my view, should not change, which is that when you do have large balance of payments surpluses, you buy the dollars because these reserves are not earned reserves, they are borrowed reserves. There are corresponding liabilities in the economy which could exit the day after," Chinoy said.

"…if these flows do come, I'd expect the central bank will not allow more than a small amount of appreciation (of the Indian rupee)."

Also Read: A decade in the making, India's global bond index inclusion journey finally ends

The inflow of foreign capital lifts the Indian rupee – or appreciates – and makes it more expensive in terms of other currencies. While the RBI has no particular target for the rupee's exchange rate, its public stance is to contain volatility in either direction.

According to Chinoy, the inclusion of Indian government bonds into the American firm's global indices will see inflows in the range of $20 billion-$25 billion over a 10-month period starting from June 2024. Other economists have predicted additional inflows of $10 billion or so if Indian debt becomes a part of the Bloomberg Global Aggregate Index.

However, Chinoy warned that the impact of these inflows on the bond market was not as straightforward, given the RBI's responsibilities on the inflation front.

"When you do buy those dollars, you are generating rupee liquidity, and sterilising that – which is what the RBI will want to do if you're worried about inflation risks – will entail the RBI selling bonds," Chinoy said. As such, while the bond index inclusion is "clearly positive" from a medium-term perspective, the impact on bond yields and prices "is a little bit more nuanced".

In August, the RBI imposed an incremental Cash Reserve Ratio (CRR) of 10 percent on banks to ensure that the excessive systemic liquidity post the withdrawal of Rs 2,000 currency notes did not pose risks to price and financial stability. Since then, the Indian central bank has announced a phased removal of the incremental CRR.

The index inclusion announcement sent bond prices soaring on September 22, with the benchmark 10-year government bond opening at 101.15 rupees, or 7.09 percent yield, as against 100.63 rupees, or 7.17 percent yield, at close on September 21. However, at 3.30 pm, the bond was almost flat, trading at 100.66 rupees, or 7.16 percent yield.

For Chinoy, more important than the amount of foreign funds that will flow into India is the fact that the bond index inclusion widens the investor base for Indian debt, which will lead to better price discovery. Further, the passive nature of these flows may also reduce bond market volatility.

"I think that's the part we should recognise, that this is passive money that's here for the long term, and therefore, is in a way, India tapping into the global pool of savings to finance its current account deficit," he said.