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Investment manager FTSE Russell has placed Indian government bonds on its watch list for a possible inclusion in one of its major indices. Indian bonds will be considered for the FTSE Emerging Markets Government Bond Index and market accessibility will be reviewed for reclassification from “0" to “1", which would put them at the minimum level needed for inclusion, the index provider said.

The announcement was part of FTSE’s semi-annual country classification review released on Monday. “For India, the inclusion is being talked about for FTSE Emerging Markets Bond Index (EMBI) and not World Government Bond Index (WGBI). The expected quantum of flows into India will depend on the percentage allocation to us. We note FTSE is a much smaller space than Bloomberg, Barclays and JPM EMGBI when it comes to EM bond index, albeit a much bigger space in WGBI with wider passive investor following," said Madhavi Arora, lead economist, Emkay Global Financial Services.

The development is an acknowledgment of India’s efforts to liberalize the sovereign bond market as rising government borrowing has necessitated opening up the domestic bond market to a broader investor base.

FTSE said global index users showed an interest in Indian sovereign securities issued via the fully accessibility route (FAR), a new category of debt sales introduced by the government last year without foreign ownership restrictions. FTSE said it will also start a version of its FTSE Indian Government Bond Index that tracks these securities in coming weeks.

During her budget speech for 2020-21, finance minister Nirmala Sitharaman had said: “Certain specified categories of government securities would be opened fully for non-resident investors, apart from being available to domestic investors."

This was followed by the Reserve Bank of India’s (RBI) notification stating that a separate route, FAR, for investment by non-residents in securities issued by the government of India has been notified. Under FAR, eligible investors can invest in specified government securities without being subject to any investment ceilings. FPIs can also access 12 series of Indian government bonds with a total outstanding amount of $163 billion. All future issuances of five-year, 10-year and 30-year government bonds are automatically included under FAR.

“The inflows into the bond market due to this specific announcement may be some time away. If international investors are convinced about the ease of investing, they are highly likely to recommend Indian government bonds for inclusion in other popular global bond indices as well," said Nagaraj Kulkarni, senior rates strategist, Standard Chartered Bank (Singapore) Ltd. “We believe this could potentially lead to aggregate inflows of $35-45 billion over 12 months from the time index inclusion is announced."

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