How  India’s entry in global bond indices will help

How do these two indices operate?

Investors are constantly in search of higher yields and keen to diversify portfolios and governments are increasingly eyeing varying sources of finance for sovereign bonds. As such, being a part of global bond indices can help trigger index related inflows. GBI-EM and Global Aggregate Index are benchmarks for emerging markets debt funds, which monitor local currency bonds issued by governments of emerging nations. They include countries directly open to the foreign investor base and largely dismiss countries with explicit capital controls, a key reason for Indian government bonds not being included in the indices.

How will the inclusion benefit India?

India has showed an improvement in its macroeconomic stability and the government is keen on capital expenditure-driven economic growth. With the Centre keen on opening up India’s sovereign bonds for greater foreign participation, the development would boost growth through investments by prompting index related inflows. Foreign investments inflow would drive India’s balance of payments position into a structural surplus zone and strengthen rupee. It will also lead to lower cost of capital and softening of interest rates, resulting in sustainability of debt, and thereby helping India maintain an investment grade rating.

What are investment grade ratings?

An investment grade or rating indicates that a municipal or corporate bond presents a relatively lower default risk, relative to other bonds and for which yields are lower than that of non-investment grade bonds. Credit rating agencies set the lowest bond rank to be categorized as investment grade.

What steps has the Centre recently taken?

Specified central government securities will be accessible by non-resident investors without curbs, the finance minister had said in the 2020 budget speech. In March 2020, the Reserve Bank of India opened up a window notified as the Fully Accessible Route (FAR) under which ‘specified securities’ would remain qualified for invest-ment under FAR until maturity. All new issuances of government securities of 5 year, 10 year, and 30 year tenors from FY21 will also qualify for investment under FAR as ‘specified securities’.

When can India join the bond indices?

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

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.