Move over, China. After much coaxing and cajoling, MSCI Inc. has given that country what it craved: an inclusion of Chinese A shares into its globally tracked benchmarks.
The bigger story now is India’s shock decision to go the other way. If Beijing sought a reward, New Delhi is begging to be punished.
On the pretext of arresting migration of trading to locations like Singapore or Dubai, New Delhi wants to ban index providers from supplying local securities data to foreign bourses for pricing, trading or settlement.
By making the passage to India more difficult for asset managers, New Delhi is practically daring MSCI to cut the country’s 9% weight in its global emerging markets index, which is followed by portfolio managers with some $1.6 trillion to invest. I don’t know if a punishment will be forthcoming, but even running such a risk amid rising panic in global equity markets—and unease among investors over India’s new long-term capital gains tax—is suicidal.
That’s why I’m convinced that although the decision came in the form of a joint statement Friday evening from the country’s three equity bourses, the National Stock Exchange of India Ltd, or NSE; the Bombay Stock Exchange, or BSE; and the Metropolitan Stock Exchange, or MSE, this is unmistakably the work of the Indian government.
For all their inter-bourse rivalries, none of the three Indian musketeers is so irrational as to believe that a permanently lower country weight because of market-access restrictions would boost their own long-term prospects. The future of Indian exchanges lies in being seamlessly connected to the global liquidity pool. Creating your own little pond of capital can only attract recreational fishermen. Super trawlers will stay away.
There are other costs. Which international exchange will want to take any partnership proposal from NSE CEO Vikram Limaye seriously when he’s being forced by his own government to serve a six-month notice to long-time ally Singapore Exchange Ltd, asking it to wind down the popular SGX Nifty contract? It’s the Indian exchange’s own reputation that’s getting tarnished here.
SGX’s recent move to start trading in single-stock Indian futures was the proximate cause of New Delhi’s knee-jerk response. Now that no vendor can provide prices to SGX, the product will have to be scrapped. Don’t rule out tit-for-tat, though. CME Group Inc., which helps SGX run a 24-hour market in the Nifty contract among others, could always turn around and refuse to provide prices to an Indian commodity bourse for it to settle rupee-denominated oil and gas derivatives.
The yearning to bring all India-related trading onshore is New Delhi’s blind spot. Wanting to tax capital formation as many as five times—something the central bank governor has also spoken about—is its obsession. So it’s perhaps hard for bureaucrats to understand why investors won’t place their India bets now in GIFT City, a ghost town in Prime Minister Narendra Modi’s home state of Gujarat. After all, finance minister Arun Jaitley’s 1 February budget, while slapping on a long-term capital gains tax, offered exemptions for GIFT.
Taxes undoubtedly influence trading decisions. But rule of law, availability of trusted peers, predictability of outcomes (including of counterparties’ bankruptcy), are also important considerations. India should have worked on these “softer" aspects while allowing investors to continue to access Indian risk offshore, so as to become familiar with it and get entwined. China used Hong Kong’s jurisdictional advantage as just such a hook, and will retain the former British colony as an amuse-bouche even when it has enough demand from investors looking for a full meal onshore.
Mandarins in New Delhi care deeply about credit ratings. But when it comes to index inclusion and weights, they’re clueless. If they ever pondered why South Korea, an OECD country, is doomed to remain an emerging market in MSCI’s book, they’d tone down the hubris.
And for that matter, the nationalism, too. Beijing has no problem letting SGX make a killing on its China benchmark: More than 67 million FTSE China A50 Index Futures contracts traded on the Singapore exchange last year, compared with 21 million on India’s Nifty 50 Index.
Eventually, SGX and NSE will hammer a way out of their mutual predicament. When they do, Indian bureaucrats must step back. They’ve done enough damage already. Bloomberg Gadfly