InvestorQ : Is it true that Indian bonds will not be included in the global indices this time around?
Aashna Tripathi made post

Is it true that Indian bonds will not be included in the global indices this time around?

Aditi Sharma answered.
2 months ago

We are yet to hear a final word from the index service providers but that is what is the apprehension that it may not happen this year. Even the government is not keen to push for index inclusion in this year due to the global volatility. However, this could spell trouble for the hopeful investors who have been buying the Indian bonds in anticipation. In last few months, there was aggressive buying in Indian government paper by foreign investors and domestic participants. This was on the back of expectations that Indian government bonds would get included in the global indices like the JP Morgan Bond Index and FTSE Bond Index.

The inclusion of Indian bonds was important since it as supposed to trigger passive flows of $30 billion into Indian bond markets. The bond index service providers were keen to replace Russia with India, since that is what even the portfolio investors had wanted. However, now it looks like the government is not pushing too hard. Recently, the government had ruled out any changes in tax policies as demanded by these index providers. That basically refers to capital gains tax exemption, which the government is averse to. Government was worried that such tax waivers would result in hot money flows causing bond market volatility.

For a long time, it was these taxes that was the stumbling block and the government had originally hinted at reconsidering. This tax exemption would also enable the inclusion of Indian bonds in the Euroclear system, which is essential for the Indian bonds to be preferred by global passive investors. With the government remaining steadfast on not offering any tax concessions, it remains to be seen what is the outcome. Both, FTSE Russell and JPMorgan Chase are likely to unveil index review outcomes next week. For now, it looks like it may have to be put off to 2023 as there is no agreement on the capital gains tax.

It is a fact that global investors are much more interested in India than in Russia, considering that India is the only trillion dollar bond market not included in the global indices. Perhaps, FTSE Russell and JP Morgan Chase could look at the logic of the diversification argument that the Indian bonds can provide to global investors. However, if they still insist on capital gains tax exemption and inclusion in Euroclear, then 2022 inclusion is ruled out. However, amidst all the global volatility, it looks like the government is not overly bothered. It could disappoint the early buyers of bonds, in the hope of inclusion.