InvestorQ : What could be the implications of India not being included in bond indices and why was it put off?
Sam Eswaran made post

What could be the implications of India not being included in bond indices and why was it put off?

Moii Chavate answered.
1 month ago

It was the most talked about developed. It was estimated that inclusion of Indian bonds in the JP Morgan Sovereign Bond Index would trigger inflows of nearly $40 billion into India. This money was to come from passive funds taking a macro view on India. However, that is not happening for now. JP Morgan, which runs the largest sovereign bond index in terms of benchmarking, has confirmed that it will keep Indian bond inclusion under review but it is not happening now. India has also not been included in the FT Russell Bond indices. So a lot of the hot money that came into bonds could now unwind in the next few days.

While JP Morgan has not added Indian government bonds to the JPMorgan Government Bond Index-Emerging Markets, it has kept the bonds under review for inclusion. This move would have made the Indian bond markets more liquid and given a boost to the rupee. There is an issue on the lengthy investor registration process in India. There is also the issue of operational readiness since India is not part of Euroclear; the global protocol. But the big hassle was the special exemption on withholding taxes that the index service providers had requested. The government has refused that point blank, which led to the delay.

Did the Indian government refuse the tax concessions deliberately? One reason is that government did not want lack of parity with domestic investors. But there is a bigger reason. Government was concerned that $40 billion of debt flows into India would make markets volatile and add to sovereign debt. The tax waiver would have led to a deluge of flows due to the tax arbitrage. That is something the government wanted to avoid. However, this could result in unwinding of flows and the yields going up again on the benchmark bonds. Next few weeks could see the impact play out.