(ATF) New Delhi has created an environment conducive to international fixed income investors and this takes India closer to becoming part of global bond indexes, the Indian government's principal economic advisor Sanjeev Sanyal told Asia Times Financial.
“The Indian government has taken a number of steps in the past year in order to make it easier for foreign investors to buy Rupee government bonds. For example, selected long-term bonds are now entirely free of any ownership ceiling and new issuances will be added to it,” Sanyal said.
“We have, therefore, created necessary conditions for Global Bond Index inclusion.”
In February this year, India's federal budget outlined plans to issue a special category of bonds that would have no ceiling on foreign ownership.
India’s government has several times in the past made attempts to enter global fixed income benchmarks but experts say this time around they have explicitly stated their intent to get included in global debt benchmarks.
Earlier this week, Bloomberg reported India is actively seeking inclusion of its government bonds in JP Morgan’s emerging market bond indices.
HSBC analysts said in a note the introduction of Fully Accessible Route (FAR) for foreign investments in government securities (Gsec) has provided the necessary conditions for inclusion in global indices.
But they added they were doubtful of immediate index inclusion as the consultation process could take time given a similar experience for mainland China.
Still, the Indian bond market, which in the past had an overall ceiling of 6% on foreign ownership of government securities, with an individual securities cap of 30%, offers superior returns to overseas bond investors. Although the global pile of negative yielding bonds has shrunk from an all-time high, it is still in excess of $10 trillion.
'Real returns are very high'
“Note that Indian rupee bonds are attractive for international investors at a time when they offer significant real returns when most countries offer near zero or even negative yields. In contrast, GOI 10-year yields offer nearly 6%. As far as Rupee returns are concerned, the real return is very attractive as inflation remains very well contained and has been so for many years,” Sanyal said.
He added that the demand compression from the epidemic lockdown had pushed the wholesale price inflation to -3.2% and the underlying trend in core consumer prices was also likely to show very low inflation.
“As a result, real returns are very high by any standards.”
Global investment banks are recommending these securities with an eye on index inclusion.
“We believe that the 4-5-year part of the government bond curve could benefit from the index inclusion but we do not recommend chasing duration,” Andre de Silva and Himanshu Malik, HSBC analysts said in a note.
DBS Bank estimated in a report that a cumulative US$70 billion worth securities are eligible under the fully accessible route, which would give it a potential weight of 4-6% on the JPM GBI-EM Index and less than 1% on the Bloomberg Global aggregate bond index. HSBC analysts expect in the event that index tracking funds increase the allocation to the benchmark weight, Gsec should receive potential inflows of $14 billion.
“If and when bonds are included in global benchmarks (also factoring in the lead time for due processes), the economy will able to draw in less volatile and long-term focused funds,” DBS analysts said in a note.
Reserves top $500 billion
Sanyal said that despite the impact of Covid-19 and its global economic consequences, India’s macro-economic stability was under no threat, given that the country’s foreign exchange reserves of over $500 billion which were more than adequate to deal with all of the country’s foreign obligations.
“The accumulation of forex reserves suggests that the rupee is currently under pressure to appreciate if anything. The current account is running at near zero and perhaps is temporarily now in surplus – but it is unlikely to return to a large deficit in the near future. The economy is steadily reviving and foreign investment inflows remain robust,” he said.