B | Photo Credit: Dzmitry Skazau

Goldman Sachs Research sees India’s sovereign bonds’ inclusion in global indices getting announced around October 2022 (Q42022) if Finance Minister Nirmala Sitharaman were to declare removal of capital gains tax and withholding tax on foreign bond investments in India on the budget day. It sees the actual inclusion to likely begin in first quarter of calendar 2023.

Any such tax removal announcement on budget day will pave the way for Indian government bonds to become Euroclearable ( an international securities settlement platform) and therefore increase the likelihood of India’s bond index inclusion, Goldman Sachs said in a research report on the eve of Union Budget slated for February 1.

While Goldman Sachs Research believes that bulk of the anticipated $30 billion inflows are more likely in 2023, the report has highlighted that some active fund managers may start accumulating Indian bonds in 2022 itself in anticipation of the announcement. However, if India becomes Euroclearable faster, it could accelerate this timeline, it added.

Goldman Sachs Research report — authored by Santanu Sengupta, Suraj Kumar and Andrew Tipton —noted that investors will be watching the Union Budget closely for any announcements that could lead to further progress on India’s potential inclusion in the global bond indices. 

Such inclusion of government bonds in the global indices — say Global Bond Index — Emerging Markets and GBI Aggregate indices — is likely to result in increased foreign portfolio investors (FPI) participation in government of India securities and therefore in overall government debt, say economy watchers. The tax waiver on euroclear settlements is seen as the possible final step for India’s sovereign bonds to be included in global indices, they added. None of the countries listed on Euroclear impose capital gains tax on bond transactions, it was pointed out.

Government borrowing

Meanwhile, Goldman Sachs Research expects India’s government borrowing in FY23 to stay elevated, and estimate an excess supply of government bonds even after assuming $10-billion FII inflows in anticipation of the bond index inclusion. 

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“This excess supply will likely require the RBI to continue with OMO purchases (on a net basis) in FY23, despite domestic liquidity constraints. Absent that, we expect the excess supply to put upward pressure on government bond yields in a rising rates environment”, the report added.

Fiscal consolidation

On fiscal consolidation, Goldman Sachs Research sees the central government target fiscal deficit consolidation by 50 basis points to 6.3 per cent of GDP in FY2022-23 from 6.8 per cent of GDP in FY’2021-22. Also, States Governments’ fiscal deficit are expected to consolidate by 30 basis points in 2022-23 at 3 per cent of GDP from 3.3 per cent of GDP in 2021-22.