India bonds inching closer to indexation


Compared to other major economies, not many Indian based companies or bonds are there in the global market. In the case of bonds, there is nothing much.

But all of that is going to change as Indian government bonds could be included in the popular indices. The bonds have been on their radar for quite a few times. But the question is, what is the potential size of the inflow the Indian market could expect?

This article will focus on two indices; Bloomberg Global Aggregate Index (BGAI) and JP GBI-EM Index (GBI-EM). They are considered because they might include India soon, and having a large number of tracking funds, they have a meaningful flow impact.

Considering that FAR Gsecs tick the criteria of market accessibility for consideration in these records, the incorporation of FAR Gsecs is conceivable in both lists. Provided they can provide progress on the concerns about settlement/operational hurdles.

FARs or fully accessible routes, introduced in the 2020 budget, in which foreign investors can buy unlimited amounts of select government bonds. On March 31, RBI notified a special series of G-secs for the FAR.

The weight of Indian bonds in both of these indices ought to be determined based on the extraordinary amount of FAR bonds (more than $200bn at present) instead of the absolute remarkable amount of Gsecs issues ($1,040bn).

When it was introduced, there were just five benchmark protections worth Rs 4.34trn ($7bn), yet it was concluded that any new issuance in the 5-, 10-and 30-year maturity bucket will be included.

This led to the growth of FAR Gsecs stocks, at a pace of $20-25 billion in every quarter. If it continues at a similar pace of inclusion and issuance, these stocks could value close to $220-240bn by 2022.

This is similar to the Indonesian government bond market of $216bn.

It could increase the potential weight of the stocks by 8-10%, then the previous estimate of 6-8%. The inflows related to GBI-EM inclusion could be $24-30bn, expecting the following AUM of around $300bn.

BGAIs weight can only be dependent on the extent of the market capitalisation of its constituents, and the value of FAR Gsecs is approximated at 0.3-0.5%, with a potential inflow at $6-10bn. It is likely to grow beyond 2022.

In total, it is estimated to bring $30-40bn of foreign investments over 10-12 months, and a foreign monthly inflow of $2.5-3.5bn.

The introduction of FAR and positive attitude towards index inclusion have increased foreign investment and NRI holdings.

Even though there was a strong outflow through non-FAR Gsecs in 2020, more and more foreign investors are leaving it and taking up FAR G-secs.

Just like Indonesia, India is presumed to be part of BGAI in a single run. Both would have had different timeframes but index inclusion’s starting date usually comes within 3-4 months.

For GBI-EM the expected inclusion would take place within 10-12 months of 2022.

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