InvestorQ : Is it true that Indian bonds will be included in the global bond indices and what are the implications of the same?
Chandralekha Desai made post

Is it true that Indian bonds will be included in the global bond indices and what are the implications of the same?

NISHA Nayak answered.
1 year ago

The latest report on Indian bond inclusion in the global indices comes from Goldman Sachs. However, this is nothing new. Back in September 2021, Morgan Stanley had issued a similar reported hinting at inclusion of Indian bonds in the global bond benchmarks. However, it is almost a year and nothing much has happened. Now Goldman Sachs has issued a reported anticipating the Indian bonds to be included in benchmark bond indices by 2023. That could have a big impact on bond flows into India from FPIs. Here is how.

How do equities attract so much of FPI money into India? Most of the money comes into Indian equities from passive funds which can be index funds or ETFs that are benchmarked to an index (typically one of the MSCI global indices). In the case of bonds, the Indian government securities are expected to be included in the JP Morgan global bond indices. If that were to happen, then India could attract passive bond inflows of close to $30 billion. Since fiscal deficit has to be funded, this can be a benign method of funding the gap.

There are pending concerns over procedural issues but many of these are getting gradually addressed. There are still some open issues with regard to diversification of the index. Once that is sorted out, Indian government bonds would be included mostly by 2023, although the precise time lines are not yet known. Even if India gets the maximum weightage of 10%, it could translate into bond market inflows of nearly $30 billion. This could give the FPIs to reallocate the money they have taken out of Russian bonds post the sanctions.

It had to happen long back, after all the Indian government bond market is worth $1 trillion, and it is among the largest among the emerging markets. The Indian market is too liquid and yields are just too attractive to let the opportunity go by for the global bond funds. For a global investment industry that is starved for yields, India offers attractive yields on their portfolio plus an opportunity to diversify their risk. Even the stable rupee dollar equation should work in their favour.

In India regulatory changes are work in progress. For instance, now the local custodians are allowed to pre-fund trades on behalf of foreign investors, which was not permitted in the past adding to the costs of the investors. The pre-funding of 3% margin in onshore margin account added to their cost and impacted their already wafer thin spreads. Also the fully accessible route (FAR) allows the foreign investors to invest in INR bonds without restrictions. In addition, extended settlement times will also be positive.