How India’s entry in the Global Bond Index will help

How do these two indices work?

Investors are increasingly looking for higher returns and willing to diversify portfolios and governments are looking at different sources of finance for sovereign bonds. Thus, being part of global bond indices can help trigger index-related inflows. The GBI-EM and the Global Aggregate Index are benchmarks for emerging markets debt funds, which monitor local currency bonds issued by the governments of emerging countries. These include countries that are open to a direct foreign investor base and largely exclude countries with explicit capital controls, a major reason for Indian government bonds not being included in the index.

How will India benefit from inclusion?

India has shown improvement in its macroeconomic stability and the government is keen on capital expenditure driven economic growth. With the Center keen to open up India’s sovereign bonds for more foreign participation, the growth will spur growth through investment by promoting index-related inflows. Foreign investment inflows will drive India’s balance of payments position into a structural surplus sector and strengthen the rupee. This will reduce the cost of capital and soften the interest rates, resulting in stability of the debt, and thus help India maintain its investment grade rating.

What are investment grade ratings?

An investment grade or rating indicates that a municipal or corporate bond presents a relatively low default risk relative to other bonds and for which the yield is lower than non-investment grade bonds. Credit rating agencies set the lowest bond rank to be classified as investment grade.

What are the steps taken by the Center recently?

The Finance Minister had said in the Budget speech of 2020 that specified central government securities would be accessible by non-resident investors without any restrictions. In March 2020, the Reserve Bank of India opened a window notified as the Fully Accessible Route (FAR), under which ‘specified securities’ under FAR would remain eligible for investment till maturity. All new issuances of government securities of 5 years, 10 years and 30 years from FY 2011 onwards will also be eligible for investment as ‘specified securities’ under FAR.

When can India join bond indices?

Morgan Stanley said Indian sovereign bonds have a high probability of being included in the global bond index by early 2022. With its inclusion, it will be in a position to attract $40 billion of one-time index inflows in 2022-23 and $170 to $250 billion in bond inflows over the next decade. This could flatten the Indian government-issued bond curve by 50 basis points and help the rupee appreciate by 2%. This will result in an advantage for Indian equity returns.

Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH.