In a post-Budget interaction with industry in Mumbai recently, finance secretary T V Somanathan said global bond indices are an exclusive club or gymkhana, which insists on entry only for those wearing ties. “If we get into this club, it will be with our dhoti and saree. We will not change our domestic policies to suit foreign investors,” he said. Somanathan’s comments come at a time when the global market is in turmoil due to the Russia-Ukraine war and Covid-related issues. Going forward, the global economy is expected to face recessionary pressures in 2023, according to most estimates. With high inflation and interest rates hitting all the major economies, the finance secretary is right in his assessment that this isn’t the best time for Indian sovereign bonds to get included in the global indices as it exposes Indian bonds to risks of volatility and pullouts as the Asian financial crisis showed in 1997. And like it or not, the Adani affair has dampened spirits about India, at least for now.
But India has been in talks with global index majors like JP Morgan, FT, and MSCI for inclusion in the global bond indices for some time now. Since 2019, there has been a lot of talk about India’s entry, with Morgan Stanley even saying that Indian bonds could be included in global bond market indices before February 2022. Even finance minister Nirmala Sitharaman had said that the Indian government was trying to sort out issues related to the inclusion of India’s bonds to attract foreign investors in India’s growing bond market. There are many advantages to getting into one or all of the global bond indices. When foreign portfolio investors start entering into bonds, it enhances the liquidity and ownership base—much like what we have witnessed in the equities market, where India has secured a place in most of the global equity benchmark indices. India, for a long time, has wanted to develop the domestic bond market. Currently, insurance companies that underwrite long-term policies often lament that there aren’t bonds with similar tenures to match their exposure. Also, lenders providing long-term loans such as home loans need to raise money through similar tenure bonds. However, in the absence of such long-term money, the loan becomes more expensively priced.
Inclusion in the global bond indices could solve many of these problems over the long run. For one, Indian banks will not be under pressure to absorb the majority of government bonds. Also, once these bonds are included in the benchmark bond indices, they will attract larger portfolio inflows from passive funds such as exchange-traded funds. Passive funds also have a positive impact on active fund participation. The rupee is also likely to strengthen on the back of foreign inflows, thereby helping reduce the import bill and, of course, the trade deficit. Then, there is the cost of borrowing—a critical factor for the government and India Inc. Higher inflows can lead to a lowering of yields on bonds. But the most crucial part—the confidence of foreign investors in India’s sovereign bonds—can make raising money much easier and change the dynamics of the economy. Of course, there are risks, such as rupee volatility and capital outflow during rating downgrades, but the merits outweigh such risks.
