How India's inclusion in Global Bond Index will bring more foreign flows

Our Bureau Mumbai | Updated on September 27, 2019 Published on September 27, 2019

A long standing suggestion by foreign investors, with regards to inclusion of India's debt instruments in global indices, will now be a reality. At the Bloomberg Global Economic Forum, attended by Prime Minister Narendra Modi, Bloomberg said it would support the inclusion of Indian debt in global bond indices.

"The inclusion of India's debt instruments in global indices would attract higher foreign flows as many overseas funds are mandated to track global indices, and therefore would increase allocation to India in alignment with the benchmark," said Teresa John, economist at Mumbai based institutional brokerage house Nirmal Bang in a note to clients.

“Most recently, in April 2019, China was included in the Bloomberg Barclays Emerging Market Bond index, with its weight in the index ultimately going up to 6 per cent. Many other index providers are now following suit. Currently, the Bloomberg Barclays EM bond index has a market cap of $2.75 trillion. Assuming a 1-3 per cent weight for India, to start with, it would amount to allocation in the range of $27.5 -82.5 billion to Indian debt,” John said.

The permissible limit for foreign investment stood at 6 per cent for Central Government debt, 2 per cent for state government debt and 9 per cent for of outstanding for corporate debt. Consequently, the permissible foreign investment limit works out to just over $100 billion by March 2020 or approximately 6 per cent of the domestic bond market. With a domestic bond market size of over $1.7 trillion, Nirmal Bang said that the Reserve Bank of India will be comfortable to opening up to the extent of around 10 per cent over a period of time

While foreign investment limits have deterred the inclusion of India in global indices, the gradual opening up should now aid this cause. The inclusion in global indices will require international clearing of domestic bonds. The Government could expedite the process as it will open up additional avenues of funding India’s twin deficits – current account and fiscal. However, given the modalities involved , an immediate inclusion in this financial year looks difficult.

Published on September 27, 2019
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