India’s inclusion in global bond indices will help in supplementing the BoP (balance of payments) surplus while ensuring incremental ‘Indianisation’ of global hot money, according to State Bank of India’s economic research team.
Following the last September announcement of the inclusion of Indian Government Bonds (IGBs) in JP Morgan Chase’s benchmark Emerging Market Index Global Diversified (GBI-EM GD) index starting June 28, 2024, monthly net inflows into FAR (fully accessible route) securities have already touched ₹90,000 crore during October 2023-June 2024, per the team’s assessment.
”India’s weight, post inclusion, is expected to reach the maximum weight threshold of 10 per cent in the GBI-EM Global Diversified index, and approximately 8.7 per cent in the GBI-EM Global index (thus, ensuring likely passive flows of $20-22 billion at current AUM/holdings by March’25).
Inflows from ETFs
“We believe choosing the JPM GBI-EM first could be a deliberate move on part of the Government/RBI to ensure future developments have a natural progression, evolving and maturing organically to mitigate possible points of friction along taxation / capital control,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
Once the Bloomberg Barclays EM bond index incorporates Indian bonds into its Bloomberg EM Local Currency Government indices, starting January 2025, the funds flow numbers further inch up, SBI’s economic research team said.
They noted that there are already a host of marquee ETFs (iShares, Vanguard, SPDR) modelled along these benchmark indices that should further crowd in inflows.
“Though Indian bonds continue to remain on watchlist of another major index provider, FTSE Russell (which cited criteria around taxation, FPI registration and settlement process for Indian markets) for inclusion in its Emerging Markets Government Bond Index (EMGBI), the next annual revision due could put a strong case for the Index managers, with the FOMO (Fear of Missing Out) effect as global trading platforms like MarketAxess, Bloomberg and Tradeweb, working closely with CCIL, are now awaiting the RBI’s approval for new launches,” Ghosh said.
India as investment destination
SBI researchers observed that several global marquee funds, at present clients of multiple indices forming a passive investment channel, and taking proxy exposures to India via instruments such as total returns swaps and supranational bonds, have evinced keen interest to enter India (the most rapidly growing large economy directly).
This indicates incremental Indianisation of global flows, making the country compete directly with China in AXJ (Asia Ex-Japan) category with foreign ownership in its bonds standing a tad above $750 billion.
“India stands tall meeting the dual mandate for global funds- risk diversification and Total Returns (TR). Bond issuances in China totaled 71 trillion yuan (about $10 trillion) in 2023, PBOC data showed.
“Going by trends, India should ascend to second largest bond market among Emerging Markets...overtaking Brazil soon that could pitch it directly with the mainland (China) for funds allocation,” Ghosh said.
Liquidity situation
SBI researchers underscored that the substantial foreign investment will enhance the government bond market depth and support system liquidity further. Thus, the liquidity situation which has been affected due to the adoption of JIT (just-in-time) mechanism through its impact on government surplus cash balances might get some respite.
However, it should also be emphasised that increase in primary liquidity from index inclusion flows is expected to be drained out, they added.
“We expect RBI’s deft handling of debt as also forex markets to smoothen the frictions going forward while the Central Bank remains committed to protect the foreign currency debt to GDP levels as India pitches for a strong case to major agencies to revisit the rating,” the researchers said.