New Delhi: The inclusion of Indian government securities in the JP Morgan emerging market debt index has the potential of making the rupee stronger and reduce the government’s borrowing costs, chief economic advisor in the finance ministry V Anantha Nageswaran told reporters on Friday.
JP Morgan on Friday said it plans to include Indian government bonds, or government securities, in its benchmark emerging market index from June next year.
The inclusion of government securities will be staggered over a 10-month period from 28 June 2024 to 31 March 2025, indicating one per cent increment on its index weight.
Nageswaran said, citing private sector estimates, that annual fund inflow into Indian government bonds could be in the range of $20 billion to $25 billion, but added there was no official estimate on potential dollar inflows. It would be a source of financing the current account deficit, he said.
Although the development could introduce volatility in the Indian bond market and the currency in times of global uncertainty, the benefits of such inclusion outweigh the risks, Nageswaran said.
The CEA explained that there will be a tendency for the currency to appreciate just as it happened between 2003 and 2008 when capital inflows into India had surged. “When there is demand from investors to buy Indian government bond denominated in Rupee, naturally, the demand for Rupee will increase and everything else being equal, there is a potential for rupee’s nominal appreciation,” he said.
“That is both positive and a challenge because we have to make sure the rupee remains competitive,” he said.
There is also the benefit of the government’s cost of borrowing coming down.
“Everything else being equal, the additional or incremental demand should see the Indian government’s borrowing cost coming down but the order of magnitude is difficult to be determined at this point,” Nageswaran said. India has projected a fiscal deficit of 17.8 trillion for FY24.
One challenge of more foreign investments coming into government bonds is the volatility it could introduce in the Indian bond market and currency at times based on investor response to global developments.
Nageswaran said that it increases the sensitivity of domestic policy to external spillovers and that one needs to keep an eye on what foreign investors would be thinking and what would happen to bond yields.
“Sometimes, during globally uncertain times unrelated to Indian macroeconomic fundamentals, there could be volatility in the Indian bond market or in the currency because of holding of Indian government securities by foreigners. That is something we should prepare ourselves for…Naturally, fiscal and monetary polices need to be cognizant of the global perception,” Nageswaran said.
“By and large at this point we welcome this development because the benefits of this index inclusion outweigh concerns and challenges which other countries are also facing,” he said.
He added that foreign investors are likely to benefit from India exposure. “Just as portfolio investors in equity markets in India have benefited over the last 30 years from their investment in Indian equities even in dollar terms in risk adjusted basis, we believe that long term patient investments into India’s government securities will also benefit in terms of earning themselves commensurate economic returns,” said Nageswaran.
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Updated: 22 Sep 2023, 08:53 PM IST