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Unlike most other major emerging markets, India is not represented in any global bond indices. However, this could change this year according to increased market talk over the last months.
Chief India Economist Upasana Chachra from Morgan Stanley expects India to be included in two of the three major global bond indices in early 2022. He estimates that this could trigger $170 bn in bond flows over the next decade. Goldman Sachs predicts bond index inclusion is likely to occur by end-2022 or early 2023.
FTSE will provide an update on the possible inclusion in its bond index by March 2022, according to David Sol, Managing Director Index Policy at FTSE Russell. Meanwhile, there is currently no estimated timeline for India’s inclusion to the Bloomberg Global Aggregate Index, as per Steve Berkley, the chief executive of Bloomberg Index Services.
The inclusion of Indian government bonds could prompt one-off flows of $30-33 bn in foreign funds in FY23, according to Bank of America (BofA) securities report.
India’s continued efforts to liberalise its bond markets
India has been pushing for the country’s government bonds to be included in global bond indices for a while now. To reach this important milestone to attract more foreign inflows, the government has been liberalising its long-held restrictions on foreign buying of its bonds market, which is estimated to be around $1.7 tn, of which approximately $1.1 tn are in central government securities also known as G-Secs or Gilts.
“Indian financial markets have witnessed far reaching reforms in the post liberalization era in terms of market design including introduction of new instrument and derivative products, regulatory reforms and technological developments,” Manesh Gupta, senior research analyst, fixed income, at FTSE Russell said in a recent report.
To encourage participation by foreign investors into the Indian debt market, the Indian central bank, Reserve Bank of India (RBI), has ramped up its bond-buying program and raised the Foreign Portfolio Investment (FPI) limit in corporate bonds as well as for State Development Loans (SDLs) and G-secs over the years. In 2020, for instance, the government opened certain categories of G-Secs fully for the foreign investors without restrictions. Additionally, RBI later notified that all new issuances of 5, 10 and 30 years will be eligible for this route.
But, despite these efforts, the foreign ownership of Indian government bonds is only about 2.5% according to the BofA. In comparison, in China it is close to 14%.
As per RBI Governor Shaktikanta Das, policymakers are making efforts to enable international settlement of transactions in government bonds, as well as trying to sort out taxation issues with Euroclear to facilitate the listing of Indian debt.
Indian corporate bonds getting more recognized
In the meantime, Indian corporate bonds have seen an increased interest from international investors recently. Indian companies have raised $6 bn selling offshore bond issues between 1-14 January 2022, the most in the first fortnight of a year, according to data from Dealogic. With its $4 bn foreign currency bonds issue conglomerate Reliance Industries (RIL) – India’s largest company – recently set a fresh record for debt fundraising in India.
Amrish P. Baliga, Managing Director at Deutsche Bank India told Economic Times that investors already started viewing India on a stand-alone basis from a traditional emerging market (EM) basket. “Clear evidence of that was yields obtained on pricing for issuers, including JSW and Adani*. Those were priced tighter than global EM peers and traded strongly in secondary markets.”
Why is the Bond Index inclusion a game-changer for India?
India’s inclusion in the global local currency emerging markets indices could be a game-changer for its debt market, suggest big investment banks. With this much-anticipated move, India would be the world’s last major emerging market to join global bond indices, following China two years ago, according to a Morgan Stanley report in October.
“India’s inclusion would trigger significant index-related inflows, followed by an allocation from active global bond investors,” said Min Dai, Head of Asia Macro Strategy at Morgan Stanley.
According to the investment bank, if added, India could represent 9.2% of the JPM GBI-EM Global Diversified Index, making it the second-largest country in that benchmark, after China.
Index inclusion would also signal policymakers’ desire to support higher economic growth through investment. “This will push India’s balance of payments into a structural surplus zone and indirectly create an environment for lower-cost capital and, ultimately, be positive for growth,” says Morgan Stanley’s chief economist for India, Upasana Chachra.
PIMCO economists in their Asia Market Outlook 2022 expect India’s bond index inclusion to be a game-changer: “Overall, we believe India offers attractive diversification opportunities given the relatively low volatility of its risk assets compared with other high-yield emerging market sovereigns.”
* note from the editors: JSW Group and Adani are two of India’s biggest conglomerates
