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It is in September that bond index providers such as JPMorgan, Bloomberg, and FTSE Russell conduct their annual or semi-annual review for country inclusion.
In March, the latter had placed Indian government securities on its watch list for inclusion in its emerging markets government bond index. At that time, some experts said that while India getting included in a global bond index is a good thing in general, an FTSE Russell bond index inclusion won’t move the needle much in terms of inflows.
The big boys in the bond index game (i.e. those which have huge money tracking them) are JPM GBI-EM Global Diversified Index, Bloomberg Global Aggregate Index and FTSE WGBI Index. EM is emerging markets, GBI is government bond index.
Now, Morgan Stanley has come out with a note saying India will be included in global bond indices in early 2022. It added that index inclusion will result in $170 billion of bond inflows in the next decade in its base case and $250 billion in the bull case scenario.
What explains its optimism?
It is premised on the fact that India will achieve “Euroclearability” very soon.
“Euroclear is a major international central securities depository (ICSD) that settles domestic and international securities transactions, including bonds, equities, derivatives and investment funds. If Indian government debt were made Euroclearable, foreign institutional investors will be able to buy and sell eligible Indian bonds using the Euroclear platform without registering domestically for clearing and settlement purposes,” explained the note.
And what are the implication of India being included in a global bond index?
Huge foreign inflows will lower borrowing costs for the government, improve the balance of payments, lead to rupee appreciation, make corporate bonds more attractive for foreign investors, and help India push its investments up, said the investment bank. Even equity returns would benefit from higher growth and low interest rates, it added.
To be sure, apart from the government’s efforts to push Indian bonds into global indices, a stable economy and an investment grade rating from credit rating agencies have helped.
But macro fundamentals remain the risk factors. The market could see lower-than-expected inflows because of persistent high inflation, ongoing large supply of government bonds due to a high fiscal deficit and a weaker rupee, said the bank.
In any case, whether such an inclusion happens in early 2022 as predicted by Morgan Stanley or later, it is something that investors should track not only because it affects macro fundamentals, but also throws up opportunities in corporate bonds as well.
Our research team has also written the following notes full of investment insights:
Net inflows into equity MFs moderate in August, but this AMC stock looks promising
Angel Broking vs ICICI Securities: Which stock should investors bet on?
Nuvoco Vistas: Overvalued or undervalued, post IPO?
SRF: Growth broadens, but margins to moderate
Aluminium: ESG compliance, lower supply keeping prices high
What else are we reading today?
Low increase in MSPs could pose risk to rural demand
India’s top executives face shareholder scrutiny over their salaries
On the new fisc turf, states hopelessly dependent on the Centre
Invesco's blockchain fund opens up new opportunities for Indian investors
Huge challenge ahead on the school front
CV makers have heavy lifting to do amid mounting headwinds to growth
Adani Ports’ growth ambitions get a fillip from Exim trade recovery
A new credit culture can transform lending, improve NPA recovery rates
NFT mania is sign of a land grab for the online ‘metaverse’ (Republished from the FT)
Michael Holding: ‘I didn’t worry about who was at the crease’ (Republished from the FT)
Picks from our Technical Analysts: Bharat Heavy Electricals, PFC and Marico (These are published every trading day before markets open and can be read on the app)
Ravi Krishnan
Moneycontrol Pro
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