New Delhi: The much-expected inclusion of Indian government bonds in global indices is not as imminent as it is being made out and will take at least another two quarters, ThePrint has learnt.
Talks between representatives of JPMorgan Government Bond Index-Emerging Markets (GBI-EM), the government, and the Reserve Bank of India (RBI) have concluded and a final decision on the listing from the index managers is awaited, top government sources said.
The managers of the index, the sources said, will take the proposal to their regional and global investor committees and an approval for inclusion of Indian government bonds in the index will be sought.
“This would procedurally take at least two quarters before an announcement is made on the matter,” a government official told ThePrint on condition of anonymity.
Listing Indian government bonds on global bond indices is expected to attract large capital flows and help India fund a part of its large fiscal deficit.
India has seen net capital outflows of $20.3 billion so far in 2022, according to data with the National Securities Depository Limited. Indian government finances have also been hit by a higher-than-estimated subsidy outgo and a cut in excise duty on auto fuels in the first quarter of the current fiscal year.
In a note to clients last month, American investment banking firm Goldman Sachs had said that Indian bonds may be included in JPMorgan’s index in 2023, a move that could fetch $30 billion worth of inflows into the country’s debt market.
Doubts had emerged earlier this year about the inclusion of Indian bonds in the global bond indices after talks collapsed with Euroclear, a trading and settlement platform that investors use to invest in foreign debt securities without having to register as foreign portfolio investors (FPI) in that jurisdiction.
Moreover, there were requests from the index managers for a likely tax exemption from the capital gains tax for investors in India’s bonds bought through the JPMorgan index. “However, the government was firm about not granting this as it sets a wrong precedent and a likely loss of revenue,” said the official quoted earlier.
But the exclusion of Russian securities from the JPMorgan index has created a fresh enthusiasm and urgency among the index managers to include Indian securities. They are considered stable and give investors a healthy return of around 7 per cent, the government official said.
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Why the excitement?
Just as equities have global indices like the MSCI Index and FTSE index among others, there are global indices for bonds as well that track such securities from multiple countries. These indices serve as a key yardstick to global investors for making investment decisions.
Some of the major global indices for bonds include ones with JPMorgan and Bloomberg-Barclays, both of which have been in talks with the Indian government. These institutions provide a wide range of indices, from emerging markets to country-specific indices. However, inclusion in these indices is not easy as they define very strict criteria.
One of the biggest challenges for the Indian government to get listed on these indices was to remove limits on how much FPIs can invest in Indian debt securities. These indices mandate that there should be no cap on the amount of securities traded on their platform.
In the past two years, two global bond indices — JPMorgan Emerging Market Bond Index and FTSE Russell — had put India on a watchlist for possible inclusion, but said the country needed to allow more access to its securities markets in terms of trading and settlement of these trades.
To facilitate this, the RBI introduced a fully accessible route in 2020, under which foreign investors and institutions can invest in Indian bonds without any restrictions or investment caps.
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The listing of government bonds on the global bond indices is expected to attract large capital flows that will help India fund part of its large fiscal deficit, which has bloated to a whopping Rs 16.61 lakh crore or 6.4 per cent of GDP.
It’s estimated that the government will borrow Rs 14.31 lakh crore in 2022-23 to fund this fiscal deficit.
A fiscal deficit is created when the government’s spending is more than its revenues. This deficit is usually filled by borrowing from banks and other financial institutions, multilateral agencies, and the National Small Savings Fund.
The Ministry of Finance and the RBI are scheduled to meet on 28 September to finalise the borrowing calendar for the second half of the current financial year. The calendar defines the quantum of the weekly borrowing that the government plans to undertake to raise money for spending on its schemes.
The government has so far raised 90 per cent of the Rs 8.45 lakh crore scheduled to be borrowed in the April-September period. The rest of the amount — Rs 5.86 lakh crore — will be borrowed in the second half of the current financial year.
With interest rates rising and the RBI not picking up a large chunk of bonds in the secondary market for government securities as it did last year, it was perceived that the government wouldn’t be able to smoothly complete its borrowing programme for the first half of the year.
(Edited by Theres Sudeep)
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