India’s weightage in global bond indices may be in 0.3-10% range
21 Sep 2021
MUMBAI: India’s potential weightage in the global bonds indices, including those of Bloomberg-Barclays and JP Morgan, could be in a wide range of 0.3 to 10 percentage points as the quantum of outstanding securities eligible for unlimited purchases by overseas funds breaches the $200-billion threshold.
Bonds foreign portfolio investors (FPIs) could purchase under the Fully Accessible Route (FAR) are now at about $203 billion (outstanding value) in 14 different tenors, show data from the Clearing Corporation of India (CCIL India). Maturities of those securities range from 2024 to 2050.
“This is a significantly large market available for foreign investors to participate in and that too without any investment restrictions,” said B. Prasanna, Group Head – Global Markets, ICICI Bank. “That’s why we believe that global bond index providers, like JPM and Bloomberg-Barclays, will find it very difficult to ignore this market for long.”
India’s likely inclusion in global bond indices is likely to draw as much as $250 billion of inflows over the next decade and reduce the cost of borrowing by as much as 50 basis points for the government, forecasts Morgan Stanley.
Of course, the weightings will be linked to what is included in the consideration set.
“If, for example, only the FAR securities were to be included in the JPM Emerging Markets Bond Index, India would hit the 10 per cent weightage cap in the index,” he said.
For the Bloomberg-Barclays index, it is estimated to be around 0.3 per cent.
India could be included either in both the indices or in one of the two.
New Delhi is said to be in talks with both the index providers. FAR securities are likely to quality for the bond index.
“FAR eligible securities, at around 18 per cent of outstanding sovereign bonds currently, are still large enough in comparison to many other countries in the indices,” said Abhay Gupta, a Singapore-based analyst from BofA Securities.
“The outstanding amount is increasing rapidly. It would increase further by likely another $25-50 billion by the time actual index inclusion begins,” he said.
India would likely get a weight of the maximum allowed 10 per cent in JPM GBI-EM GD, translating into around $ 22-25 billion, according to BofA Securities. An estimated $7-8 billion could flow in, if Indian government bonds get close to 0.35 per cent weight (based on market capitalization) on inclusion in the Bloomberg Global Aggregate index.
The authorities are currently engaged in resolving matters such as waivers of capital gain taxes or even coupon payments. Negotiations are on with EuroClear for settlement of Indian bonds.
“Higher outstanding stock will help India get better weightage in global bond indices,” said Ananth Narayan, associate professor at S P Jain Institute of Management & Research. “Only FAR securities are likely to be considered for index inclusion, not the entire outstanding stock of sovereign securities. Index administrators prefer unfettered access for portfolio investors in individual securities.”
On offshore transactions between two non-residents via EuroClear where the Indian government would not get visibility, a popular suggestion goes in favour of exempting tax for all such transactions.
“Corporate will far outweigh the costs borne by the government in foregone potential tax revenues,” said Gupta.