India has been present in most benchmark equity indices but absent in the bond indices market.
Indian bonds are expected to be included in a couple of global bond indices by next year. Even as Indian bond markets have been open to foreign investors, the inflows are less than $40 billion in the last decade. However, inflows of around $170 billion to $250 billion are expected over the next 10 years, according to Morgan Stanley.
Experts believe that the inclusion of Indian bonds in the global bond indices would be significant for the country. However, this won’t affect retail investors much.
Global indices include the emerging markets in debt, which monitor local currency bonds issued by governments of developing countries. India has been present in most benchmark equity indices but absent in the bond indices market.
“With India being included in the global indices, debt capital will flow into Indian markets. Presently, foreign ownership of Indian sovereign debt is very low; this number would increase and lower the cost of borrowing for government and private entities over time. This means the ability to raise capital at a cheaper rate,” Ajinkya Kulkarni, Co-founder of Wint Wealth, told FE Online.
At present, foreign ownership of Indian government debt is less than 2%. However, it is estimated the figure will move up to 9% over the next decade.
India’s inclusion in global indices would mean more bond investment inflow in the coming years.
“More foreign capital flowing into the country can lower yields and, therefore, the cost of borrowing for the government and Indian companies. This will help stabilise the exchange rate of the rupee and improve the balance of payments for the country. This reduction would also trickle down to private entities over the long term,” said Kulkarni.
“Approximately $40 billion would be infused immediately into the Indian debt market after the inclusion of the bonds indices market,” he added.
Why India has not been a part of global bond indices till now?
India has not been a part of the global indices because of the ongoing problems with capital controls, custody and settlement and other operational difficulties. In an index review dated 18 Sept 2020, J.P. Morgan said, “Apart from the capital controls, custody/settlement, legacy trading and operational requirements have been cited by benchmarked investors as hurdles for accessing the onshore bonds.”
Impact on retail investors
“When government bonds are included in the global indices, they come into the buy list of foreign portfolio investors. The presence of diverse pools of capital in Indian debt markets would increase secondary liquidity in the debt market,” said Kulkarni.
“Retail investors would not be affected as much, this is more towards institutional investors,” he added.