Moneycontrol Pro Panorama | Decoding India’s entry into a global bond index

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FTSE Russell, a global index service provider, placed Indian government securities on its watch list for inclusion in its emerging markets government bond index. The breathless excitement seen in the media was not reflected in the bond markets which reacted with a sense of ‘we have seen this all earlier’ before.

Indeed, the yield on the 10-year benchmark government security is up 5 basis points since Friday’s close. Partly, that follows the global trend of bonds hardening across the world fearing inflation. The yield on 10-year US Treasuries, for example, hit 1.77 percent, last seen in January 2020.

Being placed in the consideration set of FTSE Russell is only the first step in Indian bonds being included in global indices. Although Indian stocks have been a favourite of foreign investors, bonds haven’t met with the same love for a variety of factors: the government’s less-than-transparent accounting, failure to adhere to fiscal rectitude, partial capital controls, the cap on the quantity of bonds foreign investors can own – 6 percent of outstanding stock currently, and so on. For the last couple of years, foreign portfolio investors have been pulling money out of Indian bonds.

The inclusion process could take some time – it can’t happen earlier than September when FTSE Russell conducts its next review. Moreover, the assets under management tracking the FTSE Russell Emerging Markets Bond Index are not much to move the needle for India – some experts expect a listing to bring in only about $10 billion over a period.

Nonetheless, it is a significant step. For the government to continue its huge borrowing programme without paying through its nose, it is necessary to deepen the pool of investors. Thus, there have been efforts to enlist India in global bond indices.

Such indices are tracked by passive funds. Inclusion in such an index will automatically lead to foreign inflows. Reuters cited HSBC as saying that China’s inclusion in the FTSE World Government Bond Index with a 5.25 percent share will bring in $130 billion of investments over 36 months.

India has tried to ease the rules to make its government bonds more palatable to foreign investors. Last year, for example, it introduced a so-called fully accessibility route (FAR), a category that is free of limits for foreign investors.

Clearly, more needs to be done. Foreign investors have talked about clearing and settlement problems, custody issues and uncertainty over the tax regime as key hurdles.

Sorting out these issues will pave the way for India to be included in the big bond indices such as the Bloomberg Barclays Global Aggregate Index (BBGA) and JP Morgan Emerging Markets Government Bond Index. That’s when the big money will flow into Indian bonds.

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