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Markets abuzz with global bond listing talk, but too early to bring out the champagne

Markets abuzz with global bond listing talk, but too early to bring out the champagne

09 Sep 2021

NEW DELHI: It is no secret that there is a pressing need to increase the pool of investors when it comes to the Indian sovereign debt market.

Commercial banks, which are traditionally the largest bond holders, have seen their bond portfolios being stuffed to the brim over the last couple of years, as government borrowing has increased exponentially.

On the other hand, the Reserve Bank of India has already expanded its balance sheet considerably through bond purchases over the past couple of years as it has tried to keep a check on sovereign borrowing costs and those in the wider economy.

While the central bank has the ammunition to continue doing so, its decisions regarding bond purchases also take into account considerations such as reserve money creation and inflation dynamics.

The most viable option to broaden the pool is to lure foreign investment and on that front, there is a lot of buzz in the market.

Morgan Stanley Research in a report said the process for listing Indian government bonds in the Belgium-based clearing house Euroclear is expected to be completed by the end of 2021 and that consequently the GBI-EM and Global Aggregate Index would include Indian bonds in their index.

The resultant index flows in FY23 would be to the tune of $40 billion, followed by annual inflows worth $18.5 billion in coming years, the report said.

“This would push foreign ownership of IGBs to 9 per cent by 2031… In a bull case, foreigners could buy $27 billion a year thanks to well-controlled inflation, a well-managed fiscal deficit and gradual INR appreciation,” Morgan Stanley Research said.

The Indian government has for years been striving to have sovereign bonds listed on the global indices, but so far the plan has suffered teething problems, the latest being the onset of the Covid-19 pandemic.

In the Union Budget for 2014-15, then Finance Minister Arun Jaitley had mooted the international settlement of Indian debt.

Subsequently, in 2018, the Finance Ministry had even considered the issuance of an offshore sovereign bond for the first time ever. However, the plan was relegated to the backburner after several prominent economists including former RBI Governor Raghuram Rajan flagged risks to the idea.

In the Budget for the current financial year, the government permitted overseas investors full investment in certain government securities under a plan called the “Fully Accessible Route”. The step was seen as a precursor to the listing of Indian bonds in global indexes.

The key difference between launching an overseas sovereign bond denominated in dollars or euro and listing of debt on global indices is the durability of flows (as several countries such as Greece and Argentina unfortunately realised when episodes of currency volatility and domestic fiscal factors cast a shadow on debt servicing).

When a country’s bonds are listed on international indices, depending on the weightage given to that particular nation, the flows that emanate are typically those from long-term investors such as pension and insurance funds, hence preventing episodes of volatility typically associated with short-term flows or ‘hot money’.

Morgan Stanley Research believes that with a heightened degree of overseas inflows into the Indian bond market, the sovereign bond yield curve could flatten by 50 basis points while the 10-year bond yield could trade around 5.85 per cent in 2022. The 10-year benchmark government bond was last at 6.17 per cent.

“Considering IGBs’ bond yield of around 6 per cent, it could offer 4 per cent USD return over the medium term, quite attractive to foreign investors,” Morgan Stanley Research wrote.

So far this calendar, foreign portfolio investors’ net outstanding investment in government bonds has decreased by Rs 7,150 crore, data on the Clearing Corporation of India showed. RBI sets a cap on the amount that FPIs can invest in Indian government bonds – currently at 6 per cent of outstanding stock.

Morgan Stanley Research said the increased quantum of overseas flows would bring cheer to equities and banks would benefit from the lower borrowing costs.


While the talk about global listing has gained steam, there is a lot left to be done, according to sources who spoke to ETMarkets.com.

The main sticking point, according to sources, is how the government will negotiate taxation issues surrounding capital gains. “The offshore view is that no flows will come before September 2022,” a foreign bank source with direct knowledge of the matter said.

“Optimistically speaking, if everything happens according to plan, then the first flows will hit us in September 2022, but the first flows will be very small. On Euroclear, there has been no progress. On the taxation front the Indian government is not budging. So Euroclear is a long time away,” the source said.

Even if one were to view the matter through an optimistic prism, going by previous negotiations with global clearing houses such as Clearstream and Euroclear, the technicalities of the process would ensure that actual capital flows only arrive quite some time after the listing is launched.

What India has on its side is stable inflation when viewed from the perspective of the last six-seven years, a fiscal deficit that has not spiralled beyond control and a stable currency (year-to-date in 2021, the rupee has appreciated 4 per cent against the US dollar).

For FPIs, these are the key drivers to look out for.

In a recent interview with ETMarkets.com, Bank of America’s India Country Treasurer Jayesh Mehta said he does not expect government borrowing to meaningfully drop from the current level before 2024.

The government, does, however need a fresh source to finance its burgeoning budget deficit. The question is, exactly when?