The inclusion of Indian government bonds on global indices is a positive development, but it will also pose challenges, Chief Economic Adviser V Anantha Nageswaran said while speaking to reporters on September 22, following JPMorgan's decision to include India in its Government Bond Index-Emerging Markets (GBI-EM) global index suite from June 2024.
Nageswaran pointed out that one of the challenges would be ensuring that the rupee remains competitive, as it would be natural for the Indian currency to appreciate - just as it was the case between 2003 and 2008 when capital inflows into India surged and made the rupee stronger.
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"So, that is both a positive and a challenge because we have to make sure that the rupee stays competitive as well," he added.
The inclusion of Indian government bonds into JPMorgan's indices is expected to bring in billions of dollars into the domestic sovereign debt market, with Sajjid Chinoy, JPMorgan's chief India economist, saying earlier today on September 22 that these inflows could be 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.
When asked whether he had any estimate for how much foreign capital could come into India due to the inclusion of government bonds on global indices, Nageswaran said the government does not have any estimate.
While the Reserve Bank of India (RBI) has no particular target for the rupee's exchange rate, its public stance is to contain volatility in either direction.
Responding to a question on whether volatility in Indian financial markets could increase as a result of the inclusion of sovereign debt on global indices, Nageswaran said there was "no need to assume" volatility would rise.
"And if there is, we are used to handling volatility. Our central bank is very well experienced in managing currency and interest rate volatility," the government's top economist said.
Speaking more broadly on the challenges that the inclusion could pose, the chief economic adviser said domestic policy could become more sensitive to external spillovers and the government would need to keep an eye on what foreign investors think and movements in bond yields and the currency.
"Sometimes during globally uncertain times, unrelated to Indian macro fundamentals, there could be volatility in the Indian bond market or in the currency because of the inclusion or the holding of Indian G-Sec (government securities) by foreigners. That is something we need to be prepared for and also think about it accordingly," he said.
"But by and large, at this time, we welcome this development because the benefits of index inclusion appear to outweigh the concerns and challenges, which other countries are also facing," Nageswaran added.
Past hurdles
Talk of India becoming a part of these global benchmarks began a decade ago amid the taper tantrums of 2013, which forced India to boost investor confidence as the rupee's exchange rate hit fresh all-time lows nearly every single day before pulling back in September 2013.
Over the years, the discussions have continued, with a bone of contention between India and index providers being the tax treatment for gains made by foreign investors from the sale of Indian government bonds once they had been listed on the indices. India has not wanted to give more favourable tax terms to overseas investors. Nageswaran reiterated on September 22 that the Indian government had not made any changes or adjustments to its tax policy to assuage JPMorgan.
When asked whether the bond settlement will occur on-shore or off-shore, Nageswaran said he did not have the details as yet and the RBI could better answer the question.
Future moves
According to Nageswaran, government bond yields - or the government's cost of borrowing - should reduce once inflows starting coming in from the long-term investors that track global bond indices, although he added the caveat that other factors could play a role too.
On September 22, yield on the benchmark 10-year government bond opened at 7.09 percent, 8 basis points lower from its close of 7.17 percent on September 21. However, it ended the day at 7.19 percent.
One basis point is one-hundredth of a percentage point.
Nageswaran also said the foreign investors' interest in Indian sovereign debt should not adversely impact domestic macroeconomic stability. As such, to that extent, macroprudential policies "will become critical down the road, if not now".
"We have always followed policies that enhanced Indian macroeconomic stability... And if we continue to stay the path, then obviously investors will be rewarded. And we will be doing that for our own benefit; we don't have to alter the course that we have taken successfully in the last three years or even in the last eight years, wherein we kept the fiscal and monetary stability paramount. That would stand us in good stead even after the index inclusion," Nageswaran said.
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