Getting noticed . The big deal about global bonds and India’s inclusion

What are global bond indices? 

MSCI or Morgan Stanley Capital International is the most popular global equities index. Every country wants its large-cap stocks to be part of this index because it launches the country and its stocks on a large arena, which would boost investor participation, confidence and liquidity for the stock and/ or the country.

Replace equities with bonds and that’s exactly what the global bond index is also meant to do — land the country in the global bond market which would, in turn, make the bond markets buoyant. JP Morgan and Bloomberg–Barclay’s are the popular global bond market indices. 

What is their role? 

Mainly that of flows and liquidity. For global investors, tracking each market individually on a periodic basis may not be practical. Hence, being part of the index helps in getting noticed. 

Are there basic criteria required to be met? 

Yes, predominantly conditions that enable easy flow of money into the country. Hence, the size of the market, the country rating, and ease of access are the main parameters. The objective of investors participating in global indices, even equities, is primarily driven by their return expectations. To that extent, investors prefer a market that assures transparency, liquidity, ease and safety of transacting.

Therefore, absence of restrictive laws on movement of capital, availability of forex and an adequate hedging mechanism are some of the important country-level criteria for index inclusion. Two other factors which play an important role are tax laws and settlement of trade. Whether the country allows for easy repatriation of money without suffering too much taxes and is capable of squaring off trades without insisting on local settlement, plays a dominant factor in determining ease of trade. 

Is India part of the global index? 

Not yet. Russia’s exclusion from the index, earlier this year, technically paved the way for India’s inclusion, especially given that we are the second largest bond market within emerging markets. 

Why has India’s inclusion been deferred again? 

Taxation laws and the settlement mechanism are the main points of disagreement between India and the managers of global bond indices. India does not want to offer tax breaks on capital gains to overseas debt investors, which is one of the big asks for bond inclusion.

At present, long-term capital gains is taxed at 20 per cent (excluding surcharge), while short-term capital gains is subject to 15 per cent tax. The Finance Ministry is unwilling to discriminate between domestic and foreign investors and place foreign investors advantageously for the sake of bond inclusion.

Secondly, as in the case of China, India is also batting for local settlement of its government securities, if included in the index. At present, the practice is that all bonds, whether G-secs or otherwise, if listed as part of the index, are to be settled in Euroclear. Euroclear Bank is a provider of settlement services for cross-border transactions, whether bonds (domestic or international), equities, derivatives or investment funds. 

What are the advantages that accrue if you are part of the indices? 

Inclusion in the global index could see investors pump $30 billion into India’s bond market within 10 months and $170 250 billion over the next decade, pegs a Morgan Stanley report. Another report by JP Morgan estimates that foreign ownership in G-Secs may increase to 10 per cent from the current level of less than 2 per cent. While the push for inclusion has been on since 2013, the gush of liquidity is the biggest advantage of this process.

Like in developed markets, India has been keen on increasing the participation of bond funds rather than bank funds in the debt market. Index inclusion could bring in liquidity depth and help realise this objective. However, once on a global platform, with active supervision on returns, there is risk of an increase in currency volatility.  

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