Are Indian government bonds going to impact global indices, attracting more foreign funds? not just yet

New Delhi: The much-awaited inclusion of Indian government bonds in global indices is not as imminent as has been reported and will take at least two quarters, ThePrint has learned.

Top government sources said talks between representatives of the JPMorgan Government Bond Index-Emerging Markets (GBI-EM), the government and the Reserve Bank of India (RBI) are over and a final decision on listing is awaited from index managers.

Sources said the index managers will take the proposal to their regional and global investor committees and seek approval for inclusion of Indian government bonds in the index.

“Procedurally, it will take at least two quarters before an announcement is made in this matter,” a government official told ThePrint on condition of anonymity.

Listing Indian government bonds on global bond indices is expected to attract large capital inflows and help India fund a part of its large fiscal deficit.

According to data from National Securities Depository Limited, India has seen a net capital outflow of $20.3 billion so far in 2022. In the first quarter of the current financial year, the government of India’s finances have also been affected by higher than anticipated subsidy expenditure and cut in excise duty on auto fuels.

one in Comment To clients last month, US investment banking firm Goldman Sachs said Indian bonds could be included in JPMorgan’s index in 2023, a move that could bring $30 billion worth of inflows into the country’s debt market. .

Doubts emerged about the inclusion of Indian bonds in the global bond index earlier this year, following talks with Euroclear, a trading and settlement platform that can be used by investors without registering as foreign portfolio investors (FPIs). To invest in debt securities. jurisdiction.

In addition, there were requests from index managers for a possible tax exemption from capital gains tax for investors in India’s bonds purchased through JPMorgan Index. “However, the government was firm about not giving it as it sets a wrong precedent and there is potential loss of revenue,” the official was quoted earlier.

But the exclusion of Russian securities from the JPMorgan index has created a new enthusiasm and urgency among index managers to include Indian securities. They are considered stable and give good returns of around 7 per cent to the investors, the government official said.

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Why the excitement?

Just as equities have global indices such as the MSCI index and FTSE index, there are global indices for bonds that track such securities from multiple countries. These indices serve as a major benchmark for global investors to make investment decisions.

Some of the major global indices for bonds include JP Morgan and Bloomberg-Barclays, both of which are in talks with the Indian government. These institutions offer a wide range of indices, from emerging markets to country-specific indices. However, inclusion in these indices is not easy as they define very strict criteria.

One of the biggest challenges for the Indian government to get listed on these indices was how much FPIs could invest in Indian debt securities. These indices mandate that there should be no limit on the amount of securities that can be traded on their platform.

In the past two years, two global bond indexes – the JPMorgan Emerging Markets Bond Index and the FTSE Russell – had put India on a watch list for possible inclusion, but said the country should have access to its securities markets in terms of trading and settlement. Need to allow more access. these trades.

To facilitate this, RBI introduced a fully accessible route 2020Under which foreign investors and institutions can invest in Indian bonds without any restrictions or investment limits.

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Government, RBI meeting to decide October-March borrowings

Listing of government bonds on global bond indices is expected to attract large capital inflows which will help India fund its share large fiscal deficit, Which has increased to Rs 16.61 lakh crore or 6.4 percent of GDP.

It is estimated that the government will borrow Rs 14.31 lakh crore in 2022-23 to meet this fiscal deficit.

Fiscal deficit is created when the expenditure of the government exceeds its revenue. This deficit is usually met by borrowing from banks and other financial institutions, multilateral agencies and the National Small Savings Fund.

The finance ministry and the RBI are scheduled to meet on September 28 to finalize the lending calendar for the second half of the current financial year. The calendar defines the weekly borrowing amount that the government plans to raise money to spend on its schemes.

The government has so far raised 90 per cent of the Rs 8.45 lakh crore it borrowed in the April-September period. The remaining amount – Rs 5.86 lakh crore – will be borrowed in the second half of the current fiscal.

With the rise in interest rates and the RBI not taking a major share of bonds in the secondary market for government securities, it was believed that the government would not be able to smoothly finance its lending program for the first half. The year.

(Edited by Therese Sudeep)

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