For many years now, the Indian government has been trying hard for government debt to be included in the large global bond indices. The global markets currently have 3 large bond market indices, including Bloomberg Global Aggregate Index, JMP GBI-EM Global Diversified Index, and FTSE WGBI Index. When a country’s government bonds are added to one or all of these indices, they get can get a safe entry into the buy zone of foreign portfolio investors. This enhances the liquidity and ownership base of the bonds.
Here’s all you need to know about why India is trying to get a place in the global bonds index and how it will benefit the Indian government bonds.
Why is India excluded from global bond indices?
What are global bond indices?
Global bond indices include the emerging debt markets that closely monitor local currency bonds that are issued by governments of various developing nations. While India has secured a place in most global equity benchmark indices, it has not been able to secure one in the bond indices market.
Reason for India’s exclusion
As per an index review published by J.P. Morgan in 2020, India has not been included in the global bond indices due to capital control problems, issues like custody and settlement and various other operational hurdles.
When will India be included in global bond indices?
Experts believe that Indian government bonds may get included in a few of the global bond indices by 2023. While the Indian bond market, in general, has been open for foreign investors, the country has only seen inflows of under $40 billion over the last decade, which is under 2% of the total issue size. If Indian government bonds are included in the global bond indices, this is expected to move up to 9% or over $250 billion in the next 10 years.
What are the benefits of being included in global bond indices?
Some of the major benefits of the Indian government bonds being included in the global bond indices are:
- Reduced pressure on commercial banks
If India is included in the global bond index and starts attracting foreign flows, there will be a significant reduction in the pressure felt by commercial banks to absorb the majority of government bonds.
- Surge in passive investment
Just like equity investments, a majority of the portfolio inflows into debt instruments are through passive funds like index funds and ETFs that track benchmark global bond indices. Once the Indian government bonds are included in such benchmark bond indices, these will automatically start attracting larger portfolio inflows from such passive funds.
- Connection between passive and active inflows
In most countries, the general trend is that as passive fund inflows rise, so do active fund inflows in any instrument. Once passive funds start placing their bets and accumulate an instrument, there is overall rising confidence among active fund managers. Hence, if India is included in the global bond index and begins attracting passive inflows, there will be a substantial surge of active foreign fund inflows, too.
- Confidence in Indian rupee
Once Indian bonds start attracting foreign inflows, it will benefit the Indian rupee as there will be increased confidence in it, resulting in further strength and stability. With a stronger rupee, equity inflows are also likely to rise.
- Stable exchange rate
With higher foreign capital inflow into the economy, the yields on bonds can be lowered. This benefits the government and Indian companies through a lower cost of borrowing. It can therefore help stabilise the rupee exchange rate and aid the country’s balance of payments. In the long run, the benefit of a reduction in yields also flows down to private entities.
With increased participation by foreign investors, the Indian bond market can gather more goodwill. This makes it easier for the country to raise additional funds for development. Highly liquid and deep debt markets are preferred for raising funds for the nation’s development.
Thus, the inclusion of Indian government bonds in global bond indices can easily change the dynamics of the Indian economy. Although there are associated risks, such as rupee volatility and capital outflow during rating downgrades, the merits of strong foreign capital inflow into debt are likely to outweigh such risks.
Experts estimate that no less than $40 billion is likely to be infused into the Indian debt market if the government bonds are included in the global bonds indices. As the cost of borrowing will become lower for government and private entities, capital could be raised at a cheaper rate. With the availability of a diverse capital pool, the Indian debt market could see increased liquidity in the future. Overall, more than retail investors, it is the institutional investors who are likely to benefit from this.
A bond index comprises selected bonds and helps in measuring the overall bond market value. Just like a stock market index is a weighted average of the prices of selected stocks, a bond index is formed using the prices of selected bonds that are liquid.
Retail investors can invest in government bonds through direct investment by opening a Demat and trading account with a stockbroker and opting for non-competitive bidding mode. Alternatively, they can also invest in government bonds via debt mutual funds.
Yes, Indian government bonds like G-secs and T-bills are available for investment in the retail securities market.
The estimated value of outstanding Indian government securities is approximately USD 2.3 trillion. Hence, there is a huge opportunity for investors and borrowers if Indian government bonds are included in the global bonds indices.