India's entry into global bond indices and its implications - what experts have to say

The Street is abuzz with India's inclusion in a major global bonds index. Indian bonds are likely to be included in JP Morgan Global Bonds Index — Emerging Markets. India is the only large emerging market (EM) that is not part of any global bond indexes.

Back in the early 1990s, when India opened its equities to foreign portfolio investors (FPIs), bonds were still kept out of their purview as the approach was cautious because of the potential impact on the currency. The primary worry has been about hot money will come out but more importantly, go out when there is a crisis-like situation and the currency will get unhinged.

But things started to change from 2013 onwards. Since then the government has taken various steps like merging the QFI and the FII and other categories into one entity called the FPI and many other things. All of it kind of culminated in a pool called the fully accessible route (FAR) in which the government every year puts certain government securities into. And this pool is now fully open to foreign ownership.

India's macro stability is well recognised by one and all but something very immediate has also happened. A few other things — index managers like JPM, FTSE etc have had India on their watchlist of countries that could be included for a while now. The most significant trigger this year has been the exclusion of Russia from these indexes due to the invasion of Ukraine.

That opened up the room and global investors have been keen to rebalance portfolios, which became unbalanced once Russia went out.

So much so, that what was being perceived as big hindrances like non-availability of Indian bonds on platforms like the Euroclear are no longer been seen as a stumbling block — as to why is there buzz of an inclusion announcement now in September is because JPM’s annual review happens in September.

Just a bit about the Indian government securities market — the total outstanding value of the government is Rs 86 lakh crore. FAR bonds owned by FPIs total around Rs 59 lakh crore. This is a small fraction of the total bonds available in the FAR pool. If you total foreign ownership of FAR and non-FAR bonds, it works out to around Rs 1.41 lakh crore.

An India inclusion could result in $30-40 billion in 1-time adjustment inflows according to estimates by Citi and Morgan Stanley and after that, another $15-$18 billion in annual inflows over the next decade could be expected.

Compared to other countries, foreign ownership of Indian government bonds is very small. So there is plenty of room to grow.

What are the implications of inclusion — there emerges a new source of money in Indian bond markets, which means yields move lower and perhaps lower the cost of capital overseas.

This is also important in being a funding source for infrastructure development in the country. Rupee will have an appreciation bias which will have to be managed.

China was put on the watchlist for inclusion in 2017 and the announcement of inclusion came 2 years later in 2019. The actual inclusion happened in February 2020. India has been on the watchlist for 2 years now.

So will we see an inclusion announcement this time for real? Time will tell but if it happens it sure will be a milestone for India and its bond markets.

Lakshmi Iyer, CIO Debt and Head of Product at Kotak Mahindra AMC believes the devil is in the details. “What percentage of inclusion are we talking about? Are we talking about completely substituting Russia, which means it could be in the ballpark of about 10 percent? Are we talking about a bit lower than that? And what kind of timeline we will see? So euphoria might be there, but sustenance of that euphoria is a bit of a question mark right now till we get more clarity on the details,” she said.

According to Jayesh Mehta, MD and Country Treasurer at Bank of America, if the announcement comes by September end of mid-October, the actual inclusion timeline could be six months to a year away.

“The market definitely will price in if it is announced by mid-October. That is one good thing people are waiting for,” he said.