Bond inflows: Get ready for a trilemma re-tweak
SummaryGreater globalization implied by Indian G-Sec inclusion in a JPMorgan index will attract a capital bulge and weaken RBI’s rIin on inflation unless we let the rupee float more freely
India’s answer to the Impossible Trinity constitutes a peculiarly fine balance. In theory, we cannot have capital flowing freely in and out, control of the rupee’s exchange rate, and also full autonomy over monetary policy. It’s an economic trilemma. In practice, our post-1991 reform transition spelt a mix of slowly easing capital controls, a decreasingly managed float for the currency, and a central bank increasingly empowered to keep a lid on inflation. Flows from overseas into Indian assets have starred in this story of our calibrated embrace of global capital. News that JPMorgan Chase will include a clutch of government bonds in a key suite of its Government Bond Index for Emerging Markets (GBI-EM) starting in mid-2024, with their weightage likely to rise over 10 months to 10% (a la China), signals the opening of another sluice gate. As with other such indices (like Bloomberg Barclays and FTSE Russell), the GBI-EM guides the allocatory calls of major institutional investors that invest in sovereign debt. By most estimates, next year’s inclusion will draw at least an annual $20 billion extra into government paper. With domestic savings in a slump, exports flagging and import bills looking heavy, that’s clearly good news. We need all the inflows we can get.