Inclusion of G-secs in Bloomberg-Barclays Global Aggregate Index may attract $6-7 bn: HSBC report

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Published: April 1, 2020 6:45 AM

Five securities have been made eligible under the fully accessible route (FAR), two maturing in 2024, two in 2029 and one security maturing in 2049.

RBI may add new tenors or change the tenors of new securities to be designated as ‘specified securities’ from time to time, the central bank had stated.RBI may add new tenors or change the tenors of new securities to be designated as ‘specified securities’ from time to time, the central bank had stated.

With the Reserve Bank of India (RBI) paving the way for inclusion of Indian government securities in global bond indices by allowing unrestricted access for foreign investments in specific government securities, an eventual inclusion of these securities in the Bloomberg-Barclays Global Aggregate Index could attract potential flows of $6-7 billion, says an HSBC Global Research report.

We believe that this will pave the way for inclusion of G-secs in popular bond indices, including Bloomberg-Barclays Global Aggregate Index (BBGA) as well as the JP Morgan GBI EM index. In particular, this could be led by the Bloomberg-Barclays Global Aggregate Index and we think that an announcement on index inclusion is possible over the next 12-18 months,” the report said.

Five securities have been made eligible under the fully accessible route (FAR), two maturing in 2024, two in 2029 and one security maturing in 2049. The outstanding stock of these five securities that also include the current benchmark 10-year paper amounts to about $58 billion at present.

RBI had stated that in addition, all new issuances of government securities of 5-year, 10-year and 30-year tenors from the financial year 2020-21 will be eligible for investment under the FAR as ‘specified securities’. RBI may add new tenors or change the tenors of new securities to be designated as ‘specified securities’ from time to time, the central bank had stated.

The HSBC report also pointed out that while India’s potential index inclusion is a positive development in the medium term, it is unlikely to provide any immediate relief in the current environment of foreign liquidation. Foreign investors have withdrawn around $9.5 billion from Indian bonds over the past six weeks, it said.

The report further said that the eventual index inclusion could still be a distance away and noted that liquidity is also a key criterion. It, however, elaborated that despite the current liquidity constraints faced by the Indian bond market, it may not be a cause of concern under normal market conditions.

In the case of China, even after the launching of the Hong Kong Bond Connect on 3 July 2017, the BBGA index inclusion announcement came only in March 2018 and the inclusion officially started in April 2019 – although it is noted that China had additional hurdles including settlement procedures and FX hedging. These are less of restrictions for India. Liquidity is also another key criteria and even though India’s bond markets are facing some liquidity constraints due to logistics surrounding the Covid-19 outbreak, it is unlikely to be an issue under normal market conditions,” the report said.

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