(ATF) FTSE Russell has opened the door for possible inclusion of Indian government bonds – known locally as G-Secs – in one of its major global indexes. But experts say the news should be seen as a recognition of a liberalisation of India’s financial market rather than its potential to attract huge investment inflows.
The global index provider announced on Monday that it has placed the Indian and Saudi Arabian government bond markets on the watchlist for possible inclusion in its FTSE Emerging Government Bond Index (EMGBI).
The announcement was included in FTSE Russell’s semi-annual country classification review, in which the market accessibility level of Indian and Saudi Arabian bonds will be considered for reclassification to 1 from 0, FTSE said.
Simultaneously, the FTSE Russell also said it would include Chinese sovereign bonds in its flagship index FTSE World Government Bond Index (WGBI) over three years from October 31.
“We note China has now been included in FTSE WGBI, which is expected to have a larger effect due to the size of passive flows tracking the index. For India [though] the inclusion is being talked about for FTSE EMGBI and not WGBI,” Madhavi Arora, Lead Economist at Emkay Global, told Asia Times Financial.
According to Arora, the expected quantum of flows in India will depend on the percentage allocation to India, and given the relatively “much smaller” influence of the FTSE’s EMGBI than Bloomberg Barclays and JP Morgan’s respective indexes in the emerging market bond index space, the inclusion in the FTSE EMGBI may not be a big deal.
“Besides, thanks to the pandemic and India’s economic growth concerns, foreign investor interest in Indian bonds has been largely lacklustre. In fact despite, a separate category of bonds of foreign investors, foreign inflow has been negative last year because of high hedging cost (rupee-dollar conversion) and lack of enough hedging options,” Mahendra Jajoo, CIO of Fixed Income at Mirae Asset Management India, told ATF.
According to stock market regulator SEBI, the total outflow of foreign portfolio income from April last year to Tuesday was over $6.7 billion.
Experts said the selling pressure was also a result of the weakening rupee, low interest rates and a higher fiscal deficit due to large government borrowing.
However, Jajoo said that if Indian G-Secs are indeed featured in FTSE EMGBI, it will send an important signal that Indian efforts to liberalise its financial markets are working.
“The very fact that Indian bonds are finding a place in an international index means that India follows a liberal regulatory regime and possesses enough liquidity in its bond markets. The inclusion will also be a stepping stone in the sense that the inclusion could force other global indexes to take a serious look at Indian bonds,” Jajoo said.
“Currently Indian bonds do not feature in any global index,” he said, although India is reportedly seeking to join JPMorgan Chase’s global bond indexes, and looking to secure a 7% weighting in its gauges.
The Reserve Bank of India, or central bank, has been actively reforming the country’s financial markets to attract foreign portfolio investments in Indian debt.
These include simplifying regulations and providing procedural flexibilities that have contributed to easing operating conditions and reducing costs and inefficiencies, as well as expanding the limits under the Medium-Term Framework for investment by Foreign Portfolio Investors (FPIs).
But the two most significant reforms over the past year have been the introduction of a Voluntary Retention Route (VRR) the Fully Accessible Route (FAR).
According to RBI, the VRR provides relaxations to FPIs from macroprudential controls but subject to a minimum retention period.
But, in a major step towards greater internationalisation, the Fully Accessible Route allows foreign investors including non-resident Indians to invest in specified government securities without any restriction.
That aside, RBI has also promised to “pursue gradual capital account convertibility as a process rather than an event, taking cognizance of prevalent macroeconomic conditions. “
Still, some predict the inclusion in FTSE’s index may attract about $10 billion of inflows into rupee securities per year, given that according to FTSE, global index users have shown an interest in Indian government securities issued through the Fully Accessible Route.
FTSE also added that it will start a version of its FTSE Indian Government Bond Index that tracks these securities in coming weeks.
“We look forward to continued engagement with the Reserve Bank of India to further understand the enhancement programme that is currently being undertaken to improve the accessibility of the local market structure for global investors,” FTSE said.
That should draw global attention to bonds listed under the FAR, says Jajoo.
Meanwhile, with its inclusion in WGBI that roughly tracks $2.5 trillion, about $130 billion in inflows in China could be expected at a rate of about $3.6 billion a month, according to an HSBC analysis.
China's inclusion in FTSE WGBI comes after its inclusion in Bloomberg-Barclays Global Aggregate Index (BBGA) and JP Morgan Emerging Market Government Bond Index (GBI-EM).