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New Delhi: Even when viewed in isolation, the $14 billion outflow from India’s bond market in 2020 is remarkable: Foreign investors have never sold so much in a single year.

That they did so at a time when Chinese bonds are attracting record foreign inflows underscores just how frustrated some money managers have become with the pace of capital-market reforms by Narendra Modi’s government.

While China’s steady progress on bond-market liberalization has earned it a spot in benchmark indexes and helped lure $119 billion of inflows this year, India still has some of Asia’s toughest restrictions on foreign funds. The country’s failure thus far to join China in global debt indexes is adding to investor concerns about meager inflation-adjusted yields and a widening fiscal deficit.

That could become a problem for Modi as his government borrows record amounts of money to fight the pandemic. While financing costs have remained subdued this year, the risk is that the growing supply of Indian bonds begins to outstrip local demand. That could put upward pressure on interest rates and restrain the recovery in Asia’s third-largest economy from its deepest contraction on record.

India’s “financing needs have been growing significantly given the deterioration in fiscal deficits and it’s therefore key for policy makers to establish a clear framework toward a gradual opening of the market,” said Jean-Charles Sambor, London-based head of emerging markets fixed income at BNP Paribas Asset Management, which oversees about $727 billion.

In a response to questions from Bloomberg News, an Indian finance ministry official said the government is making progress on debt-market reforms and expects to join global indexes in mid-2021. “We are now carrying out the process and institutional changes needed to allow all participants to be able to buy and sell rupee Indian bonds without difficulty,” said Sanjeev Sanyal, a principal economic adviser in the finance ministry.

Bloomberg LP, the parent company of Bloomberg News and Bloomberg Barclays Indices, said in September 2019 it would help Indian authorities navigate a path to inclusion in international bond gauges.

Skeptics of bond-market liberalization have argued that India should tread carefully given the risk of hot-money flows that could destabilize the currency. That concern is one reason why Modi’s administration quietly shelved a plan, initially floated in 2019, to sell its first foreign sovereign bonds.

It’s also debatable whether the short-term benefits of opening to international bond investors outweigh the risks. India’s borrowing costs have declined this year despite foreign outflows, thanks in part to bond purchases by the nation’s central bank. Foreign inflows into the stock market, meanwhile, have swelled to an eight-year high.

Yet as the government’s borrowing needs increase, it may have a harder time finding enough bond buyers domestically. Modi’s administration plans to borrow a record 13.1 trillion rupees ($178 billion) in the fiscal year ending March and is forecast to post a budget deficit equivalent to 8% of gross domestic product, the largest shortfall in more than three decades. That comes at a time when yields on 10-year Indian bonds are hovering at around 6%, almost a full percentage point below the inflation rate.

India has taken some small steps to open its bond market this year, including by removing ownership restrictions on certain types of government debt. But the moves have done little to stem the tide of outflows, with foreigners holding just 2% of outstanding Indian bonds at the end of November.

The reforms have also paled in comparison to those taken by China, whose debt is now included in — or on a phased path to inclusion in — benchmark indexes compiled by FTSE Russell, Bloomberg Barclays Indices and JPMorgan Chase & Co. JPMorgan kept India out of its widely followed GBI-EM Global Diversified index in September, citing among other shortcomings the country’s capital controls, settlement issues and outdated trading requirements.

That doesn’t mean international investors have given up on India entirely. Closer cooperation between local authorities and index providers, along with a more stable exchange rate, could help pave the way for eventual inclusion in indexes and more global portfolios, said Joevin Teo, head of Asia fixed-income at Amundi Singapore Ltd.

Julio Callegari, lead portfolio manager for Asia rates and FX at JPMorgan Asset Management in Hong Kong, said he’s also hopeful India will make progress on reform. But he warns it could take time.

“The truth is that India is still in early stages,” Callegari said. “It should take one or two years to see the inclusion that would drive more bond investments in the country.”-Bloomberg


Also read: RBI’s dollar mopping spree could slow down as US puts India on currency watchlist


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24 COMMENTS

  1. Why slam the author without contesting the facts and figures quoted by him ? The criticism clearly appears to be motivated. If we let our political preferences make us blind to economic realities, we as a country will go down the slippery slope very fast.

  2. What a waste of an article. Do some more work. Don’t compare apple to oranges. Very misleading and amateur article

  3. From April 2020 FII sold 33 k cr in debt market & DII bought 163.5 lac cr almost 5 times of the FII sales. Plus FII have been net positive buyers for the month of December of 5.9 k cr. These are SEBI verified numbers and now you can make sense of the real data

  4. India has been borrowing a lot of money. Though the sovereign may never default on debt repayment but we need to mature our financial Market. The bond market requires a lot of maturity yet.

  5. Don’t understand why “the print, the wire” have always negative news on the Modi government and positive on the Congress-led government… Looks like this is a sold media. There’s hardly any media outlet which gives real news.

  6. If Global players has cataract eyes, its upto them to get corrected. If india doesnt attract investment, I ca strongly say no other country in this world is worth investing.
    So much transparency n do much of freedom in doing business seen under present P.M is real Good sign of Strong n smarter india world has ever seen.

    If I say any thing against the report will be seen Pro-PM. But this report needs no reply, as it is very fishy like present former agitation, well orchestrated to create confusions.

    I appeal to all the citizens, a human life is limited.

    When person start giving his views would have atleast passed 40% of his life. So Dont be thorn to development n Good things, for massaging one’s own Ego. If not we our kith kin n future Generation will live healthy Happy n peacefully.

    This is the simplest way of achieving Goal n doing Good to society even with out doing much. Be a listener n follower for Future good ideas n follower of same.

    I can keep writing. Freedom of speech, Democracy and openness to share his thoughts should not be misused for one person or party or section benefit. Please.

    Jai Hind, Jai Bharatha, Sarvejana sukinobanthu.

  7. Badly researched article. Not surprising, if it’s just ‘Politically motivated’?

    Actually India doesn’t need Foreign Institutional Investors – domestic demand is huge and it’s possibly one of the biggest emerging markets.

  8. India credit rating is BBB-, speculative junk, with 8% borrowing interest since 2019. Its worst in 2020.

    At 90% debt to GDP ratio, India is a bankrupt banana state like US. It can never repay its debts, nor able to pay up its debt interest without borrowing more every year. Hence its bond is a speculative junk with 6% interest.

    India economy has plunged 30%, with 45yrs highest unemployment rate since 2018. Inflation has hit 8% even oil price is historically low, with 11% inflation for food.

    It will spiral down with worst recession and social disintegration under COVID crisis, as its impossible for India broken economy to sustain 8% p.a. growth over next 20yrs to create 20mils new jobs every year for its explosive population growth.

    Vaccines will take few years to roll out, by then Herd immunity is already long achieved. Delhi 33% population already has antibody, Pune 85%, other states should be not far away.

    But India with daily 20,000 deaths and 80,000 new births, nobody will notice even 10,000 new COVID deaths are not reported.

    • Definitely you are not telling truth u are a threat to this world economy.compare with a the best country.
      India will rule.money market soon. We tell the truth unlike.china. Indians will.raise above all odds. Time will.tell who is Right.
      Yes India going thru rough wether but every soul in India an entrepreneur. We have just got up to challenge the world. See u in 2026 April. We will.fly I n colours.

      • I am so sorry because people in the comment section are going to come for you for speaking the truth.Our economy has crashed like never before, media isn’t free and highest unemployment rate ever recorded and yet people have the audacity to chant Modi’s name.These comments are so rotten. People are living in a delusional world filled with ideal fantasies that do not exist. India has really hit rock bottom honestly.

  9. In the history of financial markets in the world,
    RBI instead of protecting the small investors money, very chivalrous ly advised a failure bank to write off the total value of the bonds in LVB. Is it the fault of bond holders? Then whose fault is this. Undoubtedly, it is the fault of RBI. What type of supervision it did on LVB.
    The accumulated losses of LVB was Rs 3000 crores. RBI failed in its duty to protect the depositors (bond holders). They bond holders should be compensated by RBI. The Supreme Court should ceased up the mater and penelise the Government institutions who have failed in its duties.

  10. TS Darbari – Now, that may grow to be an issue for Modi as his authorities borrows report quantities of money to combat the pandemic. While financing prices have remained subdued this yr, the chance is that the rising provides of Indian bonds begins to outstrip native demand. That may put upward stress on rates of interest and restrain the recovery in Asia’s third-largest economic system from its deepest contraction on report. India’s “financing needs have been growing significantly given the deterioration in fiscal deficits and it’s therefore key for policy makers to establish a clear framework toward a gradual opening of the market. #TS_Darbari #Ts_Darbari_Blog #TS_Darbari_News #Ts_Darbari_Views #Ts_Darbari_Blogger #TS_Darbari_Comments #Ts_Darbari_Opinion #About_TS_Darbari #TS_Darbari_Articles #Politics #Views #Comments #who_is_TS_Darbari #About_TS_Darbari #Who_is_TS_Darbari

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